You have been told that markets hate uncertainty and this will lead to volatility which is bad for your nest egg and should be avoided at all costs. Time to take the risk off the table!

There are two points to make here. Basing any investment decision on short term political or macro views is speculation rather than investment. No one can accurately forecast what will happen after an election, especially this one. Last year interest rates where supposed to rise and they did not. Who would have predicted the oil price crash? It is a punt and you take your chances.

The second point is that volatility is not the same as risk. Risk is absolute loss of capital whereas volatility can be weathered with time on your side. Consider this scenario which lends some colour to the risk versus volatility argument.

Imagine a father who gives his son £100 to invest in order to pay for a (very cheap) car which will cost £200 in ten years time. The boy is given two options. He can invest in Winner Fund which will return a guaranteed £300 in 10 years’ time. Or he can invest in Loser Fund which will be worth £150 in 10 years’ time. In the meantime, he won’t be able to look at the valuation of these two funds. Unless he’s crazy, the boy is going to choose Winner Fund. He’ll be able to take the £300 to pay for his £200 car and have a bit left over.

But let’s consider a second scenario where the boy’s father wants to know what Winner Fund and Loser Fund are worth once every year. The eventual outcomes are still the same: £300 and £150 respectively, but Winner Fund has more fluctuations in value. It often falls below £100 whereas Loser Fund ekes out a stable return each year. The boy will probably still choose Winner Fund. He might worry a bit more about incurring the wrath of his dad, but he knows it’s the right choice on a 10 year view.

Now, let’s consider a third scenario. This time, the boy needs to report to his dad with the value of each fund every week. He knows that his father will be anxious if his chosen fund is down in value and he will be berated about how he’s going to pay for his car.  Now the nerve required for the Winner Fund is much stronger. After all, the fund often falls below £100. So there is a decent chance that the boy will pick Loser Fund just to avoid the stress and hassle even though he knows it won’t be enough to pay for the car.

The question to arise from this rather simple story, is whether as an investor you feel the need to pay the price of low volatility. If you do then you should expect lower returns.  Conversely if you can afford to take your time and not worry about ups and downs along the way it is likely that you will be better rewarded.  You pay your money and take your choice.