Volatility vs. Risk – Why They’re Not the Same

In Episode 17, we explore the crucial difference between volatility - the daily ups and downs of an asset - and true risk, which is the permanent loss of capital. Most investors treat both as the same, which leads to fear-driven decisions and missed opportunities. We break down how volatility can be your friend, especially if you're a long-term investor, and why short-term noise often distracts from long-term value. You'll learn how to reframe your thinking, reduce emotional mistakes, and build a more resilient portfolio. The episode also covers how different types of assets carry different forms of risk that go far beyond just price movement.

Episode Transcript

Speaker 1 (00:00):
As always before we begin, this podcast is for informational
and educational purposes only. It is not financial advice. Always
do your own research and consult with a licensed advisor
before making any investment decisions. Welcome back to the Smarter
Money Show. I'm your host, and this is episode sixteen,
and today we're talking about something that doesn't make headlines

(00:21):
but absolutely should, risk adjusted return. Most investors, especially new ones,
are laser focused on one thing performance, what's up the most,
what's hot right now, what's making people money. But there's
a smarter question to ask how much risk did they
take to get that return? Because if you ignore risk,
you're not investing, you're gambling, and you're blind to the

(00:43):
real drivers of long term success. So in this episode,
we'll walk through what risk adjusted return really means, why
it matters more than you think, and how you can
start using it to build a portfolio that doesn't just perform,
but holds up when things get rough. Let's start with
the story. Imagine two friends, Alex and Jamie. Alex invest

(01:04):
in high flying growth stocks. One year, Alex's portfolio is
up forty percent. Everyone is impressed. Jamie, on the other hand,
holds boring dividend ETFs and bonds. That same year, Jamie's
portfolio is up just eleven percent. Who's the better investor?
Most people say Alex. But here's what they don't see.
The year after Alex's portfolio drops thirty five percent, Jamie's

(01:27):
down three percent. Over two years, Alex is barely ahead
but emotionally exhausted. Jamie is calm, still compounding and sleeping. Well,
that's the difference risk adjusted return makes. Let's go deeper.
What is risk? Risk is not just volatility, It's not
just draw downs. It's also the likelihood of you doing

(01:47):
something stupid with your portfolio. Because investing is part math
and part psychology. When things swing wildly, most investors panic,
They sell low, they abandon strategy, they chase trends. That
behavior kills long term performance. So risk adjusted return isn't
just a metric, it's a lens for survival. The metrics

(02:07):
that matter. Let's talk numbers, but keep it simple. Sharp ratio,
as we mentioned earlier, return, risk free rate, standard deviation.
A sharp ratio of one point zero is solid, over
one point five is excellent. Sortino ratio like sharp, but
only considers downside volatility. Arguably, a better metric for real
world investors. Max draw down how far an investment fell

(02:31):
from its peak. It's one thing to be volatile, it's
another to drop seventy percent in a bear market. Volatility
standard deviation measures price swings. High volatility means more emotional strain,
even if the long term return is decent. Beta measures
correlation to the broader market. A beta above one means
it moves more than the market under one less real

(02:55):
world use case. Comparing portfolios, Let's say you're comparing two portfolios.
Portfolio A return ten percent, volatility eighteen percent, sharp ratio
zero point five six max draw down thirty five percent.
Portfolio B return eight percent, volatility eight percent, sharp ratio

(03:18):
one point zero max draw down twelve percent. Portfolio It
looks better on return, but portfolio B is far more efficient, consistent,
and emotionally survivable over time. Investors in portfolio B are
far more likely to stick with the plan, which means
better long term results in real life, not just on paper.

(03:39):
The psychology of risk adjusted return, let's talk mindset. If
your portfolio drops fifty percent, you need a one hundred
percent gain just to get back to even Most people
can't stomach that they sell, they hesitate to re enter,
they break the compounding machine. That's why a smoother, more
stable portfolio, even with slightly lower return, often wins in

(04:01):
the real world. Think of it this way. Investing isn't
a sprint. It's not a year by year contest. It's
a game of not blowing up, of staying in the market.
Of compounding. Risk adjusted return helps you do that. Common
mistakes to avoid chasing returns on charts without context. Don't
just look at gains, look at the path taken to

(04:22):
get there. Assuming more volatility means more reward not always true.
Many volatile assets underperform over time because of poor behavior
and high turnover. Ignoring your own risk tolerance, It doesn't
matter how good a strategy looks if you can't stick
with it during pain. Treating sharp ratios like gospel. They're helpful,
but not everything. Context matters. Use them as a tool,

(04:44):
not a religion. Final example, the turtle and the hair.
Let's wrap with one final analogy. The hair fast, reckless, exciting,
sprints ahead, stumbles burns out. The turtle slow, steady, boring,
keeps moving. Guess who wins the turtle every time? That's

(05:04):
risk adjusted return. In a nutshell, you don't need to
hit home runs. You just need to avoid strikeouts and
keep moving forward your next step. Here's what you can
do right now. Pull up your portfolio, look at volatility,
look at draw downs, look at consistency. Ask am I
being rewarded for the risk I'm taking? If not, it

(05:24):
might be time to rebalance, simplify, or shift your strategy
towards something you can truly stick with, because over time,
it's not the biggest winners who finish ahead, it's the
ones who stay in the game. And just to be clear,
this is not investment advice. You need to do your
own research, speak with the licensed advisor. Use this podcast
as a thinking tool, not a by cell signal. If

(05:45):
you like this episode, follow the show, leave a quick review,
and share it with someone who needs to stop chasing
hype and start thinking smarter. In the next episode, we're
going to talk about volatility versus actual risk and why
sometimes the scariest looking investments are actually the safest. Until then,
stay smart, stay patient, and stay invested.