Investing is somewhat akin to being on a roller coaster in the dark without being able to determine what direction is next, a drop, or an uptick? How long will it last, how fast will it be?  Volatility is simply the norm for the stock market overall. From 1980 to 2017, calendar-year returns for the S&P 500 Index ranged from a plus 34% gain all the way to a harrowing -38% on the downside. Taking into a longer period will simply yield similar results. 

Something that we feel here at The401Kman which must be said first is to avoid the daily financial news (nonsense) that is to readily available to listen to or view. We feel Warren Buffett said it best below in 2001,

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“Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of, ‘Don’t just sit there. Do something.’ 

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Warren Buffett understands extreme short-term

volatility is not only normal; it’s necessary for

generating great long-term returns. In a 2001

interview in Fortune, Buffett said,

 

“This is the one thing I can never understand. To refer to a personal taste of mine, I’m going to be buying hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up, we weep.”

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“For most people, it’s the same way with everything in life they will be buying — except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”

Further, as Buffett said in Berkshire Hathaway’s 2013 annual shareholder letter, “It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings — and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his — and those prices varied widely over short periods of time depending on his mental state — how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.

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“Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits—and, worse yet, important to consider acting upon their comments".

 

“For these investors, liquidity is transformed from the unqualified benefit it should be to a curse. A ‘flash crash’ or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.”

Focus on what you can control and try not to fret about what you can’t. Extreme short-term volatility can be a gift to long-term investors, if you let it. The last couple of months have been scary, and I have no idea where stocks will be a year from now. But history suggests investors with the courage to stay the course will be rewarded over the next 10 years.