Volatility is the price of admission to long-term returns. How we think about turbulent periods, and what we believe investors should — and should not — do about them.
Every generation of investors is periodically reminded that markets can fall quickly and without much notice. The reminder is unpleasant, but it is not new, and it is not a reason to abandon a sound plan.
Volatility and risk are not the same thing. Volatility is the movement of prices; risk is the permanent loss of capital, or the failure of a portfolio to meet the purpose for which it exists. A portfolio can be volatile and safe, or placid and dangerous. Confusing the two leads investors to sell durable assets at depressed prices — converting temporary declines into permanent losses.
Our approach to turbulent periods is deliberately unexciting. We confirm that each family's near-term needs are covered by reserves that do not depend on market prices. We rebalance when movements carry allocations meaningfully away from their targets, which as a practical matter means buying what has fallen. And we communicate, because in our experience it is uncertainty, more than loss, that unsettles people.
What we do not do is forecast. No one reliably knows where markets will be in six months, and portfolios built on that pretence tend to fare poorly. Portfolios built on discipline tend, over time, to be rewarded for it.