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.)