Kevin Ihrke, CFP® | Nov 05 2026 23:16
Imagine you're about to take an international flight.
You have two choices: Flight A, which will encounter turbulence en route, maybe severe. Or Flight B, which is expected to be a perfectly smooth flight, but may or may not have enough fuel to reach its destination.
Which situation is riskier?
I think we can all agree, Flight B’s lack of fuel would be the real risk. The turbulence on Flight A is simply discomfort experienced along the journey.
Investing works the same way.
Many investors use the terms risk and volatility interchangeably, but they're very different concepts. Understanding that difference can help you make better investment decisions, avoid emotional reactions to markets, and stay focused on what really matters.
Volatility is the extremes you're willing to endure. Risk refers to the outcome.
Volatility is what you see when stocks rise sharply one year, decline the next, and then recover again, only to decline again a couple of years later. It's the day-to-day, year-to-year, and decade-to-decade fluctuations in stock prices and the major indexes that dominate financial headlines. Sometimes it's extreme, as it was in 2022 when stocks and bonds were down double-digits. But volatility is normal.
Risk is something different.
Risk is a broad term for a number of outcomes that could occur. The most significant of which is the permanent loss of capital - aka, no longer having the money or enough money when you need it. Another way to look at risk is, failure to achieve your financial goals at the intended time or running out of money in retirement.
Failing to keep pace with inflation is another risk. Becoming overly concentrated in a single investment is a risk. Having to realize losses in an investment to fund your retirement income needs is a risk.
Unfortunately, many investors focus almost entirely on volatility because it's visible. You can see your account balance fluctuate over time. And when the portfolio value drops, that can naturally create concern.
Keep in mind, some of the most significant risks investors face has very little to do with volatility or temporary market declines. The goal then of investing isn't to eliminate volatility. The goal is to avoid the kinds of risks that can permanently interfere with your financial future.
One of the most common examples of confusing volatility and risk is gold.
Many investors view gold and precious metals as inherently safe investments. Gold has been used as a store of value for centuries and is frequently discussed during periods of inflation, economic uncertainty, or geopolitical instability.
Because of that reputation, some investors assume that increasing their allocation to gold automatically reduces risk.
But that's not really the case.
Gold can be surprisingly volatile. Over various periods, gold prices have experienced substantial declines and long stretches of disappointing returns. Unlike stocks, gold does not produce earnings or dividends. And unlike bonds, it does not generate interest income or return face value. Its value is largely determined by what the next buyer is willing to pay.
This doesn't mean gold is bad. Gold can play a valuable role as a portfolio diversifier. The lesson is simply that investments shouldn't be judged by perception but how they actually perform and align with your long-term financial goals.
Even for a truly conservative investor, a well-diversified portfolio is not built around what feels safe. It's built around diversification, discipline, and a high probability of achieving long-term objectives.
Another important piece of the puzzle is risk tolerance.
Risk tolerance is somewhat of a misnomer in that it really measures your volatility tolerance - your willingness to take on larger market swings for potentially higher returns. Some investors remain calm during a 20% market decline. Others become anxious after a 5% pullback. Neither reaction is right or wrong. Every investor is different.
One important point: risk tolerance isn't measured during bull markets. (I don't recall ever hearing an investor express concern about upside volatility.) True risk tolerance reveals itself when markets become volatile.
Your own personal preference for risk is only part of the equation. Your capacity to take on risk is an equally important factor when constructing a long-term investment portfolio. Risk capacity measures how much risk you can afford to take financially.
This distinction is critically important.
Consider a 35-year-old working professional with 25 to 35 years before retirement. Throughout that time, they continue earning income, contributing to retirement accounts, and have decades before needing any distributions from their investments. They have time to ride out the volatility.
Even a significant market decline may not permanently alter their long-term retirement outlook. As a result, this investor generally has a high-risk capacity.
Now consider a 70-year-old who retired five years ago.
This investor relies on portfolio assets to supplement Social Security benefits. All of which is needed to fund living expenses. Instead of contributing new money, they are withdrawing assets regularly.
A major market decline at this stage of life can have a much larger impact because there is less time to recover from the volatility and fewer opportunities to replenish savings. Even if this retiree is personally comfortable with market volatility, their financial circumstances may call for a more conservative approach. In other words, they may have a high-risk tolerance but a lower risk capacity.
Both Matter.
The most successful portfolios balance both your own personal preference for volatility (aka risk tolerance) and risk capacity. The ideal portfolio is one that allows an investor to stay invested through market cycles while maintaining a strong probability of achieving their long-term objectives.
Market volatility is inevitable. True investment risk is not always as obvious. A decline in a portfolio's is uncomfortable, but discomfort and risk are not the same thing. Investments that appear safe are not always low risk, and investments that fluctuate are not always dangerous.
Successful investing isn't about avoiding turbulence. It's to reach your destination.