Finance measures risk as volatility. But to an investor with a long time horizon, i.e. retiring in 30 years, volatility can create buying opportunities. It’s only for those with short time horizons, i.e. paying for child’s tuition soon, that volatility poses a threat.
So it’s not the volatility that creates risk, it’s the short time horizon. That’s why I explain in this post that you shouldn’t be investing in the stock market unless you have a long enough time horizon.
If you’ve run the numbers, and you figure you need $200,000 to pay for your son’s college next year, and you have the $200,000 saved up, then it makes no sense to have that money in the stock market. A 20% correction can ruin which college your son goes to. There’s no sense in gambling life-changing money.
So yes given your short time horizon, the stock market’s volatility would be a risk. But if your son was born yesterday, and you have 18 years to invest for his college, then volatility doesn’t matter. Any given year, the stock market can go down, up, sideways, it doesn’t matter. All that matters is having enough money saved up by the time he’s 18. And it’s far more likely to reach that objective by investing stocks than bonds.
Written in 2015