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Volatility and returns over the long term

One of the main mistakes (among many others) individual investors make is to trade too often. Indeed, individual traders should refrain to trade too much for several reasons that we have already reviewed on our blog. Another problem that individual traders face is volatility. Volatility is actually something that many institutional investors like. Unfortunately volatility almost always turns out to be a bad thing for individual investors. Why? The reason is simple. Some institutional investors trade with high frequency and volatility is the bets friend of high frequency trading. However the situation is totally different for individual investors who are mostly concerned about market volatility. An easy way to define volatility is to think about it in the following terms: volatility is a measure of the degrees to which prices chance over time. Investments with high volatility have a high degree of risk because their prices are unstable.Conversely, investments with low volatility are less risky. However you should keep in mind that over the long term risks and returns go hands in hands. In other words, investments with higher volatility will (in average) provide higher returns than investments with lower volatility. Volatility can also change over time. An asset type can be extremely volatile on a short term basis while not necessarily being volatile over the long term. The important thing to remember is that the longer you invest, the more likely you will be able to weather low market periods. This will also allow you to lower your trading cost fees.

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