Broker Check

Keeping Your Eye on the Big Picture

April 03, 2020
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These are difficult times, not only from an economic and investment standpoint, but a

community one as well. This societal strains and uncertainty over depth and timeframe of

the current pandemic adds to the volatility in financial assets. Keep in mind, though that these periodic

shocks are far from abnormal. In fact, they’re healthy checks on risk-taking, and allow a reset of expectations and re-pricing of risk.

 

If it were easy to take risk and invest in stocks (or real estate, corporate debt, etc.), such as

if they moved in a positive direction 100% of the time, everyone would be doing it. Everyone

would own high-risk assets, likely all the time, and that constant buying pressure would buoy

prices to such an elevated level that valuations based on underlying fundamentals would no

longer be logical. This would ruin their positive expected returns for the future, and increase

fragility to the point where, instead of remaining somewhat resilient, the smallest snowflake

would trigger an avalanche. Rather, periodic smaller avalanches help the mountain retain its

stability. But sometimes, if the conditions are right, avalanches can be stronger than

expected, and even become so extreme, and investors so disenchanted, that risk assets

become cheap again. The unamusing irony is that this becomes the time when no one

wants the same asset at a discounted price that they once coveted at a much more

expensive price only a month earlier.

 

It is important for investors to take a step back and view these events in proper context. It’s

the risk in stocks, and the potential for these types of drawdowns and volatility, that keep

markets efficient. If they were simple, and always consistent, riskier assets would act like

short-term bonds, and likely not even keep pace with inflation or earn enough to reach other

goals. The uncertainty creates the opportunity. (Although the reminders aren’t ever

pleasant.)