There are a few things that are important to understand about winning. First, it’s better than losing. And second, it’s not easy.
Source: www.perezhilton.com
In financial markets, winning—good performance over time—is also typically accompanied by plenty of volatility. Most investors try to avoid volatility like the plague, but according to Advisor One, that might not be a good idea, even though it seems like only the mentally unstable would actually embrace volatility. They write:
…advisors who place too much emphasis on volatility management can inadvertently spook investors into taking overly conservative positions that remove too much risk and diminish long-term return potential.
Rather than burden investors with volatility worries on a tick-by-tick basis, advisors can stimulate more rational, less fear-driven choices by touching upon volatility just annually or semi-annually. Simply put: when it comes to volatility management, focusing on short-term volatility may not be the best solution for clients whose overall objective is long-term growth.
For growth assets, you can’t afford to be allergic to volatility. It might not be a problem if you are already an adrenaline junkie, but most clients decidedly do not have that orientation. So how do you keep them from focusing only on the downside?
Source: www.likecool.com
When advisors downplay the relative importance of short-term ups and downs of their account values as compared to long-term results, investor angst over volatility should fade away. When this happens, determining appropriate risk levels becomes easier and long-term goals are more likely to be achieved.
This is good advice from work being done in behavioral finance. It is certainly a healthy attitude for relative strength investors, who have to deal with significant volatility during trend changes. A focus on volatility becomes a focus on the short-term—and that can prevent good long-term results. Winning in the short term can easily be the result of luck. Winning in the long term is usually a matter of consistency in exploiting a return factor over multiple market cycles and that takes discipline and focus.
