Volatility is a concept I think we are all much more familiar with since the onset of pandemic over a year ago. We live with greater uncertainty today overall than we have in a long time. That said, the fact that we must live with various degrees of uncertainty is not a new thing. Humans have faced adversity of all kinds going back to before history was even recorded. One needs only to think of the tag line of “Keep Calm and Carry On” which was introduced to the British population during World War II. This served as a message and reminder to the public to forge ahead, despite the uncertainty, risk and possible danger.

Markets produce more volatility in the face of increasing uncertainty. So, it’s a cause and effect dynamic. For investors, it’s essential to understand that volatility is normal. A common error among investors is to believe that volatility should be avoided and that an investment strategy should involve one’s ability to forecast these moves and make decisions to sidestep them. If you consider an investment vehicle like stocks, these are investments in businesses- all of which are subject to various changing cycles. These could be unique to the type of business they are in and subject to the type of business demand there is for what they offer - this would be a business cycle. In tandem with business cycles are economic cycles which are more a measure of the overall market conditions (reported by country usually). Is the economy expanding or contracting? Are interest rates rising or falling in response? There are also Secular cycles which are longer and last the better part of 20 years. All 3 of these types of cycles are examples of external factors that can affect businesses (stocks) and tie into volatility.

Here is the simple truth: No one can predict the future and therefore provide a guarantee of how results will be arrived at. No one has a formula to do away with uncertainty. What history has taught us is that evolution advances us forward despite the challenges we are faced with (over the long term with examples like Healthcare and Technology). I might add that I believe the challenges we are faced with make us more determined to overcome and succeed. They are part of what makes it work. Good businesses also succeed at what they do, provided they are well managed, but not without having to deal with the variables of uncertainty and ‘up and down’ cycles.

When we examine long term rates of returns for stock markets around the world, they will confirm this same success. Investors have done very well by embracing all forms of cycles and volatility and recognizing that TIME is their biggest asset, when investing.

To provide a sense of what normal volatility can look like, consider this: Going back 20 years US Stocks (S&P 500) have historically had a 10% correction 70% of the time (as illustrated in the chart below). More noteworthy perhaps is that volatility can lead to very large down moves in individual years, and yet still finish the year materially higher.

So, essentially, volatility is exceedingly normal. The best strategy is for one to accept and live with it, recognizing that these forces are entirely out of our control.

Keep Calm and Carry On.