A Reprint On Volatility.

Since we're in a period of heightened volatility I thought I'd go back and reprint something I said a few years ago on the subject:

"Volatility is the price investor’s pay for liquidity.  It is the reset mechanism that often caps the financial excesses that sometimes can lead to large market declines. Investors should expect some volatility and should accept that sometimes prices will correct. Volatility is most often associated with market declines. Volatility can work both ways but presumably investors don’t mind when there is a sharp gain in their investments. Investors though mostly hate volatility when prices head lower, especially when the declines are swift and steep, as we’ve recently seen.  I receive few questions about markets on days where they go up 2%.  So I will repeat what I have often said in the past.  We know of no mechanism or system short of being 100% in cash that can completely protect a portfolio from volatile markets.  If Warren Buffett has not developed a way to protect his portfolio from market declines then we surely are not about to.  {Again, Buffet’s Berkshire Hathaway was down 11% in 2015.}  While there are ways to hedge a portfolio, these can be expensive and will often produce losses as a function of the hedge that the average investor is not willing to tolerate.  The best hedge in our opinion for a portfolio is cash.  The best action in our analysis is to have a disciplined investment plan and to readjust that plan as market forces dictate.There are strategies in our playbookthat deal with trendless and more volatile periods that we use in our game planfor client accounts.  The goal when investing is to be aware when the markets are in a lower probability environment, have enough cash that fits into your risk/reward parameters so you can ride out the decline and then be able to deploy that cash when markets begin their next advance."

I'll only commit  to one post next week, most likely Wednesday.  I'll discuss Part III in our series on the Road Forward after Thanksgiving.