Fisher Investments UK

Understanding Volatility’s Role in Your Portfolio

It’s no secret many investors struggle with market volatility. But volatility can actually be your best friend. When many people think about volatility, they imagine stock market corrections and steep market declines.

In reality, volatility is a two-way street. Volatility to the upside is just as significant and helps drive stocks’ long-term rise. You probably like volatility when it’s to the upside (although you probably don’t think of it as “volatility”) and you probably hate the downside variety. Here’s another example. Many investors exclaim their disdain for equities after a downturn, but these same people have huge appetites for shares during a roaring bull market. This is classic myopic loss aversion—the tendency for investors to feel the pain from investment losses much more than they feel joy from gains. This often leads investors to try and protect themselves from future short-term losses and the pain those would cause. These investors aren’t necessarily risk-averse; they’re often just short-sighted and not fully aware of the risks they are taking. If you fear the volatility of equities, some cognitive coaching, staying focused on the long term, and planning for the most probabilistic outcomes might help you learn to tolerate or even love volatility. This might enable you to benefit more from the historic returns of equities.

It’s not easy to stay disciplined during periods of stock market volatility, and some investors just can’t handle the wiggles. Humans naturally think about near-term survival, which is good but may not help when navigating complex capital markets. However, if you can train yourself to think longer term, the “can’t sleep-at-night” factors tend to fade away. For long-term investors, an investment coach or adviser may be one of the best remedies to worry and a safeguard against potential investing errors that often accompany such emotions.

If you’re investing for the long term it can give you a different perspective on volatility.

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