The Price We Pay for Higher

Jun 2019

If high future stock market returns seemed to be as smooth and predictable as bank deposits, the demand for stock investments would be so high that stock prices would rise to a much higher level. That higher starting level would result in going-forward annual returns that would approximate the low interest rates banks now pay. Catch-22. The perception of smooth and high stock market returns in the future would create the conditions for low future returns. Based on history, over the long term we can pursue high average returns if and only if we are willing to accept near-term price swings—volatility. Put slightly differently, investors are “paid” stock-like returns in order to shoulder the natural volatility of stock prices. No volatility, no high returns. That’s one important reason why volatility is good for us.