Liz Koh: Don't panic - we live in volatile times

The impact of the financial crisis in Greece has been felt in the stockmarket.

The impact of the turmoil in Greece on sharemarkets is a classic example of how the emotions of fear and greed create volatility.

When shares start to drop in value, investors can become fearful of sustaining further losses. This leads to panic selling, which further fuels the fear.

Eventually, a turning point is reached when less risk-averse investors spot the potential for gain. Increased buying activity pushes prices up, and fear is diminished.

The outcome of this process is that risk-averse investors suffer losses while gains go to those who are less risk-averse.

Significant events can have a ripple effect on markets, just like a pebble being thrown into water.

High levels of uncertainty create high volatility and, as the outcome becomes clearer, the uncertainty and volatility gradually decrease.

Volatility is a test of true levels of risk-aversion.

It is easy to be a confident investor with a high exposure to growth assets when volatility is low and returns are high.

Falling prices reveal attitudes to risk. They also reveal insecurities formed from previous episodes of volatility.

Memories of events such as the Global Financial Crisis can create irrational fear.

Diversification is one of the principal tools for reducing risk. The risk of investing in a portfolio with an adequate level of diversification is not a risk of loss but a time risk -- that is, how long the investor has to remain invested in order for value to be restored and for the investor to be rewarded with a rate of return over the investment period which reflects the degree of risk taken. Volatility is a reminder that investment in growth assets is a long-term game.

If long-term goals and strategies have not altered, short-term volatility should be of little concern.

* Liz Koh is an authorised financial adviser. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free. Call 0800 273 847. For free e-books see moneymax.co.nz and moneymaxcoach.com.