Stock prices tumbling? Four ways to control your risk.
2. Invest for the greatest potential return with the least amount of risk
It seems obvious today, but Harry Markowitz won a Nobel Prize for developing a theory around that idea in the 1950s. One way of expressing risk or volatility is standard deviation – how much the price of a stock fluctuates from its average value. So if stock ABC fluctuates wildly (has a greater standard deviation) than stock XYZ, it is the riskier stock. If both stocks have the same average return over the long term, the prudent choice is to pick the stock with the lower risk.
Investors should know the standard deviation of their investment portfolio, because it will give them some idea of how much it will fluctuate, says Dan Solin, an investment adviser with Index Funds Advisors and author of several books on investing. "Risk is not bad. The reason you get rewarded is you take risk."