Simple Truths About Money

6. Volatility is the price we pay for the higher long term return potential of stocks.

Stocks are more volatile than bonds or cash and returns are not certain. Uncertainty is risk. The risk of a stock can be measured by how volatile it is: the degree to which the price goes up and down while you are holding the stock. But, volatility does not imply that the stock will go down, it is just a characteristic that stocks have and needs to be endured in order to earn higher returns.

There have been many studies that show individual investors panic and sell stocks when the market is volatile and down and then buy stocks after the market has gone up. This is the reverse of the adage: "buy low, sell high";, and results in unsatisfactory investment returns.

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