Understanding the Price of Volatility: How to Find Peace in Turbulent Times
Everything has a price. We’re used to it by now. We live in one of the most capitalistic countries on earth, during the most prosperous time in human history. We’re conditioned to think about goods and experiences in terms of dollars and cents. Perhaps that’s why market volatility is such a challenging concept.
When it comes to most transactions, we face three options:
Decline — if the cost is too high, we don’t pay it. Netflix at $10 a month might be less than I value it, but a price increase to $15 could lead me to binge-watch everything before my next billing period and cancel my subscription. That’s the beauty of capitalism — we have choices, and the most important one is declining to exchange when the price is higher than our perceived value (or more than we can afford).
Accept — everything you purchase is worth it to you (at the time anyway). When a good or service provides more value than it costs, we pay the cost.
Negotiate — no one walks off the used car lot feeling like a loser. If we don’t like the price, we can attempt to negotiate. Negotiating is common in some transactions (buying a house or car) and less in others (groceries at a large grocer), but negotiating remains an integral part of commerce.
Investing is one of the best ways to build wealth, and it too has a cost. That cost is volatility. Once this is accepted, it’s much easier to find peace during tumultuous times.
Why do we struggle with volatility?
It’s worst when we’re most vulnerable. If market volatility only occurred when everything in the world felt right, most people wouldn’t bat an eye. Unfortunately, volatility isn’t so kind. It rears its ugly head when we’re experiencing anxiety about the future. Not only does the world around us feel like it’s crumbling, but our portfolios are losing value, and we’re scared about tomorrow. Volatility is harsh.
The price isn’t clear. Volatility is the cost, but we don’t know precisely how much we’ll pay or for how long. We hate uncertainty, but there would be no volatility without uncertainty — thus, no risk and no reward.
We’re conditioned to avoid loss. The stakes were much higher before technology and innovation created the mostly safe world we exist in today. Resources were scarce, and competition was fierce — survival was on the line. It’s hard to imagine our early ancestors’ difficult circumstances, but their fight to survive left us with a natural tendency to avoid loss. Investors must face our ancestral history each time volatility reemerges.
Volatility is unavoidable. You can manage it by intentionally designing a portfolio with a particular risk profile (similar to negotiating). Still, there is no guarantee that the historical trends will hold.
Knowing the long-term value of staying invested, why are we so tempted to try to avoid the price of participating?
Noise — turn off the financial news, or as Carl Richards calls it, “the Financial Pornography Network.” The news media doesn't exist to help you make more informed investment decisions. The old newspaper adage “if it bleeds, it leads” applies to modern media. Dr. Peter Diamandis explains that we process most information through the amygdala — a part of the brain that is “responsible for primal emotions like rage, hate, and fear.” The media targets those emotions since information related to those primal reactions s receives top priority. Turning off the news doesn’t equate to being ignorant; it allows for information processing in a more intentional, less emotional way.
Politician’s Logic — “Something must be done. This is something, it must be done” — that mentality is referred to as the politician’s logic. When it feels like things are out of our control (which they usually are), we’re tempted to act to regain a sense of control. As with politics, the action may or may not make sense in hindsight, but at the moment, we’re able to convince ourselves that action is better than no action. The illusion of control can lead us to make poor long-term decisions.
It’s understandable to be fearful when your investments are losing value. You can’t escape doomsday prophecies about hyperinflation, another great depression, or a world war. These outcomes are all possible, and since no one can accurately predict the future, many people are willing to make unlikely predictions if they get attention and money in return. But allowing fear and panic to inform your investment decisions can lead to shortsighted actions that you might later regret. During volatile times I find comfort in the stoic views on anxiety. The famed philosopher Seneca the Younger wrote:
“We are more often frightened than hurt; and we suffer more from imagination than from reality.”
Seneca didn’t have an investment portfolio two thousand years ago, have access to a 24/7 news cycle, or a constant barrage of information and opinions to sift through. However, he still recognized that our imaginations could lead us to suffer from worry and behave in destructive ways. For long-term investors, it’s best to acknowledge volatility as the cost of admission. Your stress level will thank you, and you’re performance probably will too.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from James Vermillion, and all rights are reserved.
