Taking this investing thing to the Nth degree, to its end, the investor must at some point embrace and even enjoy volatility for him or her to be truly successful. This means having the ability to live with both more and less than expected and still being content and at peace.
Returns and Volatility are inextricably linked. We must never forget this. You will not get a return in your investments greater than the rising cost of the things you buy if you are not taking on some level of uncertainty. For folks who are closer to needing their retirement account, we can diversify away much of this uncertainty, but some level must still exist or you will be losing money against inflation.
All of us would like to have double-digit positive returns year after year. We know, at least intellectually, that we might possibly encounter down markets as well. But what we rarely do in our heads is put these together as necessarily linked. Most investors, and I think even many of my own clients, want to think that it’s possible to get the positive years and avoid the negatives. Indeed, we all know someone who has said they “got out just in time.”
And that is all the proof we need that our desire for stability is strong. We see amazing things happen all the time in the movies we watch. We read about them in our novels, and we see them regularly in the lotteries and sports reel highlights. Amazing things are possible. Wouldn’t it be amazing if I could time things right this time and miss the next decline? You bet it would. And someone will pull it off just like someone will win the lottery this week. But I’ll still advise that you leave both strategies out of your investing.