Volatility Is Your Friend

This week I want to talk a lit­tle about volatil­i­ty.

The mar­ket at the moment is a lit­tle… chaot­ic? Trump says one thing, the mar­ket crash­es. He says some­thing else, the mar­ket jumps. Wars, inter­est rates… as Tony always says, “There’s always some­thing”.

Volatil­i­ty isn’t our ene­my. It isn’t unusu­al. It’s the NORM.

It reminds me of a book I read in my twen­ties, Jim Rohn’s clas­sic “The Sea­sons Of Life”.

Jim talks about the par­al­lels between life and the chang­ing sea­sons. To realise that the sea­sons will change with­out fail and what we can do to utilise each sea­sons to get the great­est rewards. It is basi­cal­ly based on the para­ble of the sow­er and the reaper. What to do in one sea­son, to ensure suc­cess in anoth­er sea­son.

Invest­ing has sea­sons, too. The soon­er we learn to think of “volatil­i­ty” as just “sea­sons”, the bet­ter investors we will become.

Chaos in the mar­kets is only a prob­lem if you don’t know what you’re doing. If you don’t have a sys­tem that tells you what to do in times of chaos. If you don’t have a sys­tem that tells you that you should be sow­ing dur­ing the chaos in order to reap the rewards lat­er on.

And if your sys­tem does­n’t tell you what to do in times of chaos, and chaos is the norm — then it isn’t a very good sys­tem.

Peo­ple pan­ic when the mar­ket crash­es. They freak out. They run for the doors.

We should all take a note from Dou­glas Adams.

Aviate-Navigate-Communicate-Administrate

But while the sea­sons hap­pen to us, how we sur­vive them depends on our tools. See­ing as Tony bor­rowed the idea of using a check­list from pilots, it’s appro­pri­ate to bor­row anoth­er idea from them:

‘Avi­a­tion in itself is not inher­ent­ly dan­ger­ous. But to an even greater degree than the sea, it is ter­ri­bly unfor­giv­ing of any igno­rance, care­less­ness, inca­pac­i­ty or neglect.’

Accord­ing to this post on Flight Safe­ty Aus­tralia, “a fun­da­men­tal prin­ci­ple of pilot­ing” is ANCA — avi­ate-nav­i­gate-com­mu­ni­cate-admin­is­trate.

“The avi­ate-nav­i­gate-com­mu­ni­cate-admin­is­trate (ANCA) mod­el exists for rea­sons learned over a hun­dred years of pilots liv­ing and dying. The first pri­or­i­ty should always be to keep con­trol of the air­craft. No pilot has ever struck ter­rain while fly­ing straight and lev­el. Many pilots, how­ev­er, have crashed as a result of pri­ori­tis­ing check­lists, radio calls, map-read­ing, cock­pit indi­ca­tors, or oth­er non-crit­i­cal tasks, over fly­ing their air­craft.”

In the world of invest­ing, “keep con­trol of the air­craft” means “keep the port­fo­lio in the air” or, as TK says, “always stay ful­ly invest­ed”. Don’t pan­ic and crash your port­fo­lio into the ground (that is, pan­ic sell every­thing). Keep it fly­ing.

When the mar­ket drops 10%, most peo­ple “Com­mu­ni­cate” first (post on forums, call their bro­ker). A QAV investor Avi­ates: they check their alerts. The QAV sys­tem dic­tates the pri­or­i­ty of move­ment so pan­ic nev­er enters the cock­pit.

The QAV sys­tem will nav­i­gate for us. It tells us when we have to sell some­thing and when to buy. It is designed for volatil­i­ty. We like to buy stocks when they are on dis­count, right. And when are they most like­ly to be on dis­count?

DURING PERIODS OF VOLATILITY.

Most peo­ple run away from a sale at the depart­ment store. Ama­teur investors are the only peo­ple who run out of the build­ing when things get 20% cheap­er.

If you crash your plane dur­ing a volatil­i­ty, you are miss­ing out on the great buy­ing oppor­tu­ni­ties that only come around one or twice a decade.

My last quote:

“There is noth­ing either good or bad, but think­ing makes it so”
Ham­let (Act II, Scene 2)

“Volatil­i­ty” can be good or bad for your port­fo­lio. It all depends on how you think about it. Let’s make volatil­i­ty our friend.

As TK once said — we want to be “Upward­ly Volatile”.

---

QAV Myth Killers is a week­ly col­umn in the QAV newslet­ter, tak­ing apart a piece of
invest­ing con­ven­tion­al wis­dom. Read the series, or
get it by email every Fri­day.

Gen­er­al advice only. Space­craft Pub­lish­ing Pty Ltd
trad­ing as QAV is a Cor­po­rate Autho­rised Rep­re­sen­ta­tive (CAR 001292718) of MF & Co.
Asset Man­age­ment Pty Ltd (AFSL 520442). This is gen­er­al infor­ma­tion and does not take your
per­son­al cir­cum­stances into account. See our
dis­clo­sure.