Volatility has surfaced with a vengeance so far in 2022. On Tuesday, US stocks logged their biggest one-day loss since 2020 as investors fretted about inflation and whether technology company earnings growth would help justify their still fairly lofty valuations. Owing to a crazy quilt of these and other issues, including rising interest rates and supply chain concerns, the Morningstar US Equity Index has dropped about 13% for the year to date, and the technology-stock-heavy Nasdaq Composite index has logged losses of nearly 20%.

At times like these it’s worth remembering the difference between volatility and risk. At first blush the distinction seems like one of semantics, but it’s actually pretty meaningful. Volatility—periodic market downturns—is something we have to live with in order to earn strong long-term returns from stocks. Volatility becomes a risk if you need to be a seller in an environment when an asset class is down.

The good news is that you can manage both volatility and risk. The very best way to manage volatility is to ignore it. Turn off CNBC, go for a walk, read a book that has nothing to do with investing, or plan to make something new for dinner.

The best way to manage risk, on the other hand, is to maintain enough in safe assets to help ensure that you’re never a seller in a downdraft. Holding a complement of safe assets is particularly pressing if you’re retired and actively drawing upon your portfolio, and it’s the underpinning of the bucket approach that I often discuss. But de-risking is also important for younger people who have short- and intermediate-term non-retirement goals such as home purchases and renovations and college funding. During the long-running bull market, it was easy to get lulled into a sense of complacency about equity risk; this year’s volatility is here to remind us that we shouldn’t. If your situation has changed, there’s no shame in reducing stocks now.

The question is, how should we define safety today? Owing to rising yields, the Bloomberg Barclays Aggregate Index has lost more than 8% year to date. Short-term bonds have lost about half that amount, but it’s a loss just the same. Cash investments have remained stable, but that’s somewhat illusory when you factor in higher inflation.

That’s why I like the idea of taking a multi-pronged approach to safety, encompassing cash, short-term and intermediate-term bonds, inflation-protected bonds, and even dividend-paying stocks. In a sustained equity-market downdraft, you could “spend through” your safe bulwark, depleting cash first, on to short-term bonds, and so on.

Speaking of safety, one of the best safe investments has been hiding in plain sight this year: I-bonds, which offer a princely yield of more than 7% through April and will likely pay even more in May when the yield is adjusted for March inflation data. I-bonds pay a fixed rate of interest as well as a variable rate to reflect inflation. The inflation adjustment is what has sent I-bond yields soaring recently and is why I-bonds have been characterized as one of the top safe assets you can find. If there’s a fly in the ointment it's the purchase constraints on I-bonds--$10,000 per calendar year plus another $5,000 in paper bonds purchased through a tax refund. That limits their utility for large investors.

Diversifying within your equity portfolio is also a sensible tack, in that stocks have been anything but a monolith so far this year. Growth stocks have gotten clobbered, as noted earlier, but value stocks have performed much better, logging only small losses for the year to date through late April. Dividend payers have also held their ground much better than the broad market. The much-ballyhooed resurgence in international stocks hasn’t materialized, but I’m keeping the faith there.

I also like the idea of thinking out of the box about safe sources of “return” beyond your investment portfolio. Retiring mortgage debt is one strategy to consider, particularly if retirement is close at hand and you’d like to reduce the demands you place on your portfolio. In a similar vein, an annuity can make sense for some retirees. (I recently took a look at a specific flavour of deferred annuity called a qualified longevity annuity contract, or QLAC.)

In the end, it’s important to not over-control for any one single risk factor, because if you do, you’ll probably end up courting some other risk in the process. For example, if you go overboard with inflation-protective investments like commodities and energy stocks, your portfolio would be vulnerable to a recessionary shock. It’s a good time for humility, and diversification is a wonderful way to express that. Diversification is a way of saying any number of things could happen and that you’ll be reasonably prepared no matter what.