Volatility in the financial market is often misunderstood and viewed negatively. However, renowned author Morgan Housel sheds light on this concept in his book, “The Psychology of Money,” stating that volatility is not a punishment but rather a fee for the opportunity to earn higher returns than simply saving your money. In this article, we will explore the significance of volatility and its relation to financial returns.
The Nature of Volatility
Volatility refers to the fluctuation or variability in the prices of financial assets over time. It is the natural state of the market and an inherent part of investing. Volatility can be caused by various factors, including economic events, market sentiment, and unexpected news.
While volatility may seem unsettling, it is important to understand that it is a normal and necessary aspect of the financial markets. In fact, without volatility, there would be no opportunity for investors to earn higher returns. Volatility is like the waves in the ocean that come with the territory of sailing towards your financial goals.
Volatility as a Fee, Not a Fine
Morgan Housel’s analogy of volatility as a fee provides a fresh perspective on this topic. Viewing volatility as a fee implies that there is a cost associated with the potential for higher returns. This fee represents the short-term ups and downs that investors must endure in exchange for the long-term growth and compounding of their investments.
Just as you pay a fee to invest in a mutual fund or hire a financial advisor, volatility is the fee you pay to participate in the market and potentially earn higher returns. It is not a punishment or fine for being invested; rather, it is an inherent part of the investment journey.
Embracing Volatility for Better Returns
Understanding the relationship between volatility and returns is crucial for investors. While volatility can be unsettling and may tempt some individuals to make impulsive investment decisions, it is important to stay focused on the long-term goals and resist the urge to time the market.
Historically, the stock market has demonstrated an upward trend over the long run despite short-term fluctuations. By staying invested and embracing volatility as a necessary component of the investment process, investors position themselves to benefit from the potential rewards that come with it.
Volatility is an essential part of the financial markets, and it should be viewed as a fee rather than a fine. Understanding the nature of volatility and its role in the investment journey is crucial for individuals seeking to grow their wealth. By embracing volatility, investors can position themselves to earn better returns and achieve their long-term financial goals.