Volatility Is The Price of Admission

'It’s all too common to think that when the market temporary falls 10% or even 20% that people immediately want to say “something is broken” or “someone made a mistake”. The President made a mistake, or even *gasps* my CFP made a mistake - who is to blame for this catastrophe?

When the reality is, this is simply par for the course and dealing with that uncertainty and volatility is why you can do well over time, that is the cost of admission! The admission is you must be willing to pay to do well over time with your investments.

And what if you don’t want to put up with uncertainty over time? Well, there are bank accounts and money market funds that will give you the meagre returns that you deserve. As the age old saying goes, you cannot have your cake and eat it too. Accepting that there will always be periods of instability and fluctuations is a mindset. You cannot avoid this.

But, if you can put up with the (what seems to be daily) nonsense and endure it over time – the rewards for those that stick around can be extraordinary.

It’s the idea that volatility is simply a fee, a cost of admission but it is not a fine. A fine means you did something wrong, and you are being punished. A fee is just you’re paying something to in return receive something of greater value, and that’s exactly what dealing with uncertainty is when investing.

This fee can be hard to swallow when markets fall. I understand this and no one (myself included) likes to see their investments drop. But I believe that investors need to be reminded of this fee when times are good, and times are not so good.

We recently helped an older couple with their tax and estate plan and while consolidating their portfolios, I was yet again amazed at what Albert Einstein coined as the 8th wonder of the world, compounding interest.

This couple had been investing for over 50 years! And  holding some of these positions for several decades. Think about that for a moment, they have held on through the crash of 1987, the Dot Com crash in 1999, the Great Financial Crisis in 2008 and then Covid! And every other catastrophe du’jour in between you can think of.

All the while, their portfolios have produced returns that would make your brain do mental gymnastics. This is a couple who never earned high incomes, didn’t inherit sums of wealth or had a business they exited for millions. These are regular folks who raised a family and invested part of their income every month. For some reason we over complicate what building wealth really looks like.

 I love to see these types of investors because its another great reminder for me in several ways. First, building wealth takes time. There's a famous Warren Buffet quote that states that the stock market is "simply a device for transferring money from the impatient to the patient." Secondly, and maybe most importantly, is that owning a well diversified portfolio of quality companies (stocks) is the absolute best way to build wealth over time.
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So the next time you see the markets take a temporary fall just remember, this is the price of admission and part of being a successful investor.​