Volatility And Risk

We're going to take some time in future posts to discuss the concepts of volatility and risk.  The investing public for the most part views both of these as the same thing.  They are not.  Today as an intro go read this article over at Greenspring Wealth.  To me this is the key takeaway:

"As an investment industry  we tend to look at a statistical metric called standard deviation.  That measures how much volatility you can expect with a specific data set.  The problem is that standard deviation is almost always quoted over a one-year period.  But what investor has a holding period of one year?  In reality, most people are investing for 10, 20 or 30 plus years.  What should matter to them is not what volatility their portfolio could experience over one year, but over their entire investing holding period.  Investors only realize losses after they sell.  If they don't have to sell, no losses have actually been realized.  As we have often said, there are really only two days that matter when you invest…the day you buy and the day you sell.  Everything in between is just noise."

Warren Buffett also weighed in on risk and volatility in his spring investment letter:

"The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities — Treasuries, for example — whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments — farriskier investments — than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray."

I think this is important concept to understand because most investors hate, absolutely hate, volatility.  The reason for this is they constantly worry that whatever market decline they are in at the moment is the beginning of another bear market.  We noted here in our most recent client communication what you usually have to see for one of those to occur.  We'll be talking about this more as we go along to try to educate investors about the differences between the two and some strategies to deal with each.

Currently scheduling posting Monday, Wednesday and Thursday next week.

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.