You should not invest in the stock market, the bond market, the commodities market, or any market if you cannot handle volatility. Period.
Why?
Because, by nature these markets are volatile. If you cannot stomach seeing the value of your account go down, don’t invest. People that cannot withstand this, will act counter to their best interests and many times will lose money. My professional advice would be to not invest.
The chart below to an untrained medical professional might be mistaken for an EKG chart. But it’s actually the 3-month price return of the stock market over the last 70+ years. No doubt about it, on a quarterly basis, the stock market is volatile, there have been several times that the market is down 20+ percent, and dozens of times it’s down 10 percent.
Like most things in life, you will see what you focus on. If you focus on the short-term, that is what you will see.
Below are the price returns of 3 different rolling return time periods, from 5-years to 20-years. Revealing that when an investor who is willing to think and act long term is rewarded. Since 1950, historically there has never been a 20-year rolling period (purple line) that produced a negative return.
So what do these charts tell us?
Your likely hood of losing money in the stock market goes down significantly the longer you are willing to endure the pain of short-term volatility.
If you have a difficult time experiencing volatility, then you have three choices:
- Don’t invest.
- Hire a professional who can help you invest in a way that matches your risk tolerance, or
- Dig-deep, and do your own research to make sure you are invested in a way that volatility won’t scare you out of your investments.
-Paul R. Rossi, CFA