02 Nov Volatility is a Monster who Goes Around Scaring Investors
There are many ways to drive from Bedok to Changi Airport.
You searched Google Map which suggested two routes to you. What made you decide one route over the other?
Maybe you have chosen the expressway because there would be less traffic lights and the journey will be smoother, despite a slightly longer distance.
Some may consider the other route because he or she is more familiar with it, and moreover the distance is shorter.
Visualizing how the journey would pan out (potential traffic jam, frequency of traffic lights, etc) is second nature to drivers. However, we fail to apply this thinking to investing. Investors often emphasize on potential returns (destination) and overlook the volatility (journey).
Look at the chart below. Both strategy A and B give you the same returns. But the process of getting there is different. Strategy A has a lot more ‘twists and turns’, or academics call it volatility, while Strategy B achieves similar returns with less adventure.
The danger of not considering the volatility in a strategy is that the investor may give up before reaching the destination. And sadly to say, most investors give up investing when the price has came down markedly. To put it crudely, volatility will scare the shit out of you. It is hence important to understand the potential volatility of any strategy and at least be mentality prepared for it.
Permanent Portfolio is one of the best strategies to minimize volatility while not giving up too much returns. Read more about it here.
Always think about the journey before you invest. Can you continue the ride when times are bad?