In light of the recent ups and downs in the stock markets, I decided to write about investment concepts again. If you’ve been paying attention (and I don’t recommend it if you value your sanity), you know that the markets have been pretty volatile this year. You may also have noticed that he financial press is happy to remind you of that. Shock, horror, and hysteria ring from the rooftops: dogs and cats living together, mass hysteria!!! Here’s one of my favorites: “Dow Drops 700 Points Because Everyone is Afraid of Something.” Thank you, www.barrons.com, for providing my first belly laugh of the day on Oct. 10 of 2018.
How can I be so sanguine when the world is falling apart? We’ll, I’m not sanguine about everything but I’m OK with volatility in the markets. That’s because volatility and risk are two different things. Stock market volatility refers to the variation in prices over time. When we talk about risk, however, we are really talking about the risk of actually losing money.
The idea of truly losing money is a lot scarier for me than price fluctuations. But I see a lot of fear in my practice because of the temporary US stock price drop we saw in 2007. If you ignored this admittedly large fluctuation and stayed invested, you would now have even more than you had BEFORE that downturn! You wouldn’t have “lost” anything unless you sold at the wrong time.
It’s important to realize that volatility is positively related to your returns. Yes, the more volatile an investment, the higher the potential return. Note that cash has very low volatility, but you also can’t make much money investing in cash. Bond values don’t fluctuate a lot, but they also earn you a lot less than stocks. Volatility and opportunity are synonymous; no one is selling investments with no volatility and great returns…because those investments don’t exist.
OK, it’s statistically possible that we could see a wholesale meltdown of all world financial markets…maybe in case of a nuclear war or Zombie Apocalypse. But the risk of losing every cent in your broadly diversified, annually rebalanced portfolio is actually very low and would require something like said Zombie Apocalypse. Let’s be honest: none of us can plan very well for that scenario. But barring the literal end of the world, the odds of losing money are very low if you invest it properly and then BEHAVE properly.
The real risk? Running out of money because you live to be 98 and the value of your savings has completely eroded because you were too scared to buy stocks. The ups and downs were just too much for you. But your paltry returns on bonds and cash couldn’t keep up with the taxes and compounding inflation over your long life. THAT is what I call truly scary.
The good news is that there is a world of stock investment opportunities out there for those with the intestinal fortitude to march through the volatility without selling.