The Case For Calm – Rethinking Risk
Does Volatility Equal Risk?
Rethinking Risk
Wall Street often defines risk as volatility because it’s simple to measure. But as Howard Marks explains, volatility isn’t what keeps investors awake at night. “I’m afraid I could lose money” is far more relatable than “I’m afraid the price might fluctuate.”
Consider Warren Buffett’s Berkshire Hathaway. Since 1980, its stock has lost half its value four times, yet Buffett has never sold a single share. Why? Because he understands that short-term price swings aren’t true risk—selling at the wrong time or overpaying for a stock is.
Why Volatility Is Your Ally
Market volatility feels scary, but it’s far less threatening over a long horizon. If you check your portfolio daily, you may see losses over 40% of the time. Look every five years, and that figure could drop to 12%. Over 12 years? Potentially no losses at all.
Fund manager Tom Howard explains it well: “By focusing on short-term volatility, it is almost certain that investment risk increases.” The more we fixate on the squiggly lines of daily returns, the more we risk undermining our long-term goals.
Managing the Real Risks
True risk isn’t the market’s ups and downs—it’s overpaying or investing in unstable businesses. A strong investment strategy includes a focus on fundamentals, like:
- Is the leadership trustworthy?
- Does the company have pricing power?
- Is there a margin of safety in the price?
Volatility may feel uncomfortable, but it’s not your enemy. It’s the price of admission for potential long-term rewards. Nassim Taleb captures it perfectly: “No stability without volatility.”
So, What Do I Do Now?
1. Consider Redefining Risk with a Long-Term Lens: Stop equating risk with short-term market fluctuations. Instead, focus on the real threats: overpaying for investments, permanent loss of capital, and failing to meet your financial goals.
2. Consider Training Yourself to Embrace Discomfort: Recognize that volatility is part of the journey. Limit how often you check your portfolio—longer intervals reduce emotional reactions and keep you focused on the big picture.
Self-Reflection Question
What steps can I take to let go of short-term fears and focus on the actions that lead to long-term financial success? How can The Gardner Group help you achieve your financial goals?