I have a fear of heights AND speed. I’ve told my kids I will never be the one to take them on a rollercoaster. It’s a fact, they’re too dangerous!
Our perceptions are all different when it comes to market risk, too. Money and feelings go hand in hand, making objectivity hard to accomplish.
Let’s start by talking about what risk is not.
Risk is not volatility. Volatility is the near-term unpredictability of equity (stock) returns.
Risk is not negative. The media highlights market downturns using a fear-based, “this time it’s different” approach.
Risk cannot be avoided. You simply make a choice of what to risk and when.
Risk is measured by the probability that you won’t achieve your goals. How can your portfolio minimize the risk that you won’t achieve your goals?
In 2022 we experienced our most volatile year since 2008. How might that be reframed into an increasingly optimistic attitude about participating in the market? Observing the V-shape graph six months before and after the epic March 2009 bottom, the rebound mirrored the decline. This is a historical observation, of course, and not a crystal ball prediction.
Historically as prices decline, value increases. You buy on sale, instead of at a premium. That makes volatility an opportunity. And, if seeking opportunity helps you achieve your goals, then how might you approach risk differently?
I’m saying get on the rollercoaster.
Bonds, compared to equities, are considered a less risky, more conservative investment option. Over the last century, the real compound return of mainstream equities has been 2.3 times the return of comparable bonds. This renders bonds an irrational holding in a lifetime or multi-generational portfolio. In other words, to suppress volatility is to suppress permanent return.
That doesn’t mean equity investing is easy. I’ve personally invested through 14 corrections (down 10%) and bear markets (down 20%) and counseled investors professionally through 7 of those. But it is simple. The only way to fully participate in market gains is to fully participate in market declines.
Stock prices tend to be more volatile than the fundamentals of the companies themselves. But guess what? Human nature is even more volatile than both. Being human means that we our reaction to loss is much more averse than it is pleased about gain.
I discourage extreme pessimism at the bottom but I also discourage euphoria at the top.
Turn off your media apps. This too shall pass. I still believe.
Past performance is no guarantee of future results. Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, and Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Spring Hollow Financial, LLC and Cambridge are not affiliated.
