Famous Quote from peter lynch goes “my best moments on stock was not on 3rd week or 3rd month but on 3rd year ” Short term volatility in the market can’t be control. Here is the chart of S&P 500 from year 1990-2022 :
We have +10% Annualized return .
World has seen 2 World wars during that time , Multiple Asset bubbles and biggest housing market collapse .
Compare that to current issues . i bet you will see less of worries. It doesn’t mean market didn’t collapse when issue happened. if we substract the % Drawdowns .
You will end up -8.9% Annualized holes in your pockets. Which means if you are chicken little and sell at every market drop you won’t survive.
That is the difficulty, because you can’t have one (long-term gain) without the other (short-term pain).
Since 1990, the S&P 500 has averaged an annual return of 10%. And it’s done so despite two bear markets of more than 50% and being in a downtrend 90% of the time.
Which means that risk is clearly a feature of markets, not a defect, and the primary reason why holding equities over time earns you a premium.
However, when markets collapse and volatility surges, that perspective can be lost. Panic sets in, and the desire to sell follows. For investors, acting on that impulse can be disastrous.
Because panic creates opportunity, and you want to be a buyer of opportunity, not a seller, if you’re a long-term investor.
When volatility is at its highest, the news is flooded with only negative stories (war, recession, unemployment, bankruptcy, pandemic, etc.). During such circumstances, investors are prone to overreacting, believing that conditions will never improve. This lowers pricing and valuations while raising potential long-term rewards.
The evidence is clear…
The S&P 500 has delivered average returns during the next one to five years that are not just positive but also far above periods when volatility was lower, after the top 10% of weekly closes in the Volatility Index ($VIX above 28.6).
And following the 20 highest weekly closes in the $VIX, we’ve seen the strongest future returns on average.
All of these things occurred during recessions and bear markets, when it appeared like the world was ending. But it didn’t, and investors who took advantage of the panic would enjoy the benefits in the end. That is to say, every previous recession and bear market was eventually followed by an economic expansion and a new all-time high in the future.
In 2022, we are again back in a very volatile market with a plethora of reasons to panic and sell (inflation, rising interest rates, Fed tightening, war, economic slowdown, etc.).
The only reason to stay on is a lesson we’ve learned many times before in the market.
And the lesson is this: converting transitory volatility into permanent loss is the biggest mistake an investor can make. It’s not merely the loss realized by selling during a drop. But, more crucially, the loss of future opportunities to build genuine wealth.
The first rule of compounding is to never interrupt it unnecessarily.” – Charlie Munger
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