Market Volatility Is A Good Thing

Recently, press and news outlets have spent a lot of airtime and ink lamenting about the "crazy" market we're in and the increased volatility we're experiencing.  They speak of this volatility as if it's a bad thing, but it's not.  Volatility is something that should be embraced and even celebrated by the long term investor.

Why do money markets, CDs and the like only provide minimal returns?  It's because they're considered safe and mostly predictable investments.  If you put in one dollar, you can be reasonably certain you'll be able to get that dollar back at some point in the future plus any interest it's earned along the way.

How about bonds and other longer-term fixed income investments.  Generally, you can expect to receive a little more return for these investments but it's only because they represent more risk.  Issuer default is one example of the risks you take on with these types of investments.

OK, so how about stocks?  They offer the greatest potential for return, but with this potential for return comes the risks that CD or bond investors don't have to deal with.  But, if stocks weren't risky and more volatile than other investment alternatives, there would be no opportunity for greater returns.

Put more simply . . . stocks have a higher historical return because of the volatility associated with them.  If there were no uncertainty, there would be no reward for owning stocks versus other investments.

So, I encourage you to look upon current and future market volatility as something to be expected and even welcome, for if there's no volatility, there will be no return above and beyond that of CDs or bonds.

Writer Lynn O'Shaughnessy reinforces this concept in her recent article which can be found here.