An old friend is back in town, his name is Volatility. For a while, it felt like he had completely forgotten us, but that’s the type of friend he is. He may delay, but sooner or later he shows up – and he doesn’t have many friends. But he is my friend, and I understand him, so he asked me for a favor – he asked me to explain him to others. I’ll try to keep it simple.
Volatility is the large moves UP and DOWN in the stock market. Volatility is the ‘wave’, is the one that makes motion possible, without it, it wouldn’t be the stock market it would just be your savings account. Most people like volatility on the way up as the market is going up, they don’t question it – at that moment it’s their best friend, it just becomes their hated uncle during the phase down.
There’s also too many emotions and narrow framing. The picture above is such a narrow time period (just one day, Thursday, Feb 8th) and looking at that you’d think this stock market thing is bananas. But pull back a bit and give time and you see a completely different picture. See below at a 1y and 3y charts, they look completely different – and a much different picture if you look even longer term.
Few tips on our ‘V’ friend
1. Understand that that’s part of the game – can’t go to the ocean and complain that it has waves or is more ‘volatile’ than a lake.
2. Try to keep things in perspective – if your goal is 10+ years away, why look at daily performance. Do you check your house’s value daily? Even if you did (say checked Zillow daily) would you sell your home when the price goes down 5%, 10% (according to Zillow) – and then buy back the next day as Zillow says it’s worth more now?
3. If your goal is less than 5 years away and you noticed a 10% drop in this last week or so, then you’re in the wrong portfolio. Check with us to correct.
4. If you noticed the same drop of 10%, but your goal is 10+ years away, maybe you shouldn’t have checked your portfolio so often, but your portfolio is Ok. If you don’t have a portfolio but just random stocks put together you have it wrong too.
5. If you cannot help but check as often as possible, try to ‘lose your password’ on purpose. Delete any app that makes it easy for you to check (I just took one app out) or remove them from your browser’s favorites.
6. Change all your passwords to new, completely random, hard and long ones. Save them to a hard-drive and put the hard drive away. For safety make a copy in another hard drive, just in case.
7. Lastly, if none of the above work – try this: Create random generated (strong, 15-20 random characters) passwords for all your accounts, only save them at one (password protected) hard drive. Deposit the hard drive at a safety deposit box at a bank. Give the key to your best friend. Tell your friend only to give the key to you once a year. 🙂
It’s extreme, I know, but the point here is that like POGO said ‘We have met the enemy and he is us’. The most important factor and where an advisor can add most of the value is in the behavior part of investing, what to do, what not to do and how to manage your emotions so you stay on track. The rest is now doable by a computer or robo-advisor. But those cannot protect you from yourself.
A while back we wrote about the next crash and what to do about it. For many the answer is very simple, just do something else. Read here.
