Volatility Is Part of the Price of Investing

According to a recent survey, half of respondents said they had become more conservative because of market volatility. That reaction is understandable. When markets decline and headlines turn negative, reducing risk can feel like the safest response.

But volatility is not a flaw in investing. It is an inherent part of it.

Every generation of investors has experienced wars, recessions, inflation, financial crises, and other events that created fear and uncertainty. Yet despite those disruptions, markets have continued to reward patient, long-term investors.

The Tradeoff

Every investment decision involves a tradeoff. Becoming more conservative may reduce short-term fluctuations, but it can also reduce your opportunity for long-term growth. A decision that provides comfort today may make it harder to reach your future goals.

That does not mean a portfolio should never change. Adjustments may be appropriate when your goals, time horizon, income needs, or circumstances change. But changing course simply because markets feel uncomfortable deserves careful consideration.

Volatility also creates opportunities. When the market is moving up and down, some investments go on sale and we look to readjust as we see appropriate opportunities. 

Volatility is temporary, but decisions made during volatile periods can have lasting consequences. Rather than trying to eliminate uncertainty, investors should consider both sides of the decision.

Reducing risk may provide short-term relief. Remaining committed to a thoughtful long-term strategy may offer something more valuable: a better opportunity to achieve the goals the portfolio was designed to support.

© Behavioral Finance Network