- No matter how much theories you went through or how much you explain it to yourself, you will never understand what is balancing until you have experienced it on a bike.
2. Likewise, investors will never understand volatility until they have experienced it with their wealth at risk.
3. Many investors think they can stomach volatility. Perhaps it is overconfidence or the Dunning-Kruger effect – their expectation of their ability to handle volatility way exceeds the reality.
4. It is easy to look at the historical charts and say the market drops and drawdowns were acceptable. That’s theory. Going through them and seeing your wealth evaporating in front of your eyes is a different story. Not many can stay calm.
5. It is easy to invest during good times. In fact, it is easy to invest in riskier assets for higher returns when the markets are doing well. The mindset is about ‘how much more returns can I get’. Stocks that don’t move are boring and a waste of time.
6. The whole psychology reverses when the market turns south. All the overconfidence turned into doubts. All the talks about great businesses, high potential and solid management became meaningless simply because the price went down. Blame the Fed, inflation, government, markets, other investors, or anyone and anything.
7. The mind runs through something like this, ‘this is too painful and I need to get out of it’. Blaming reduces the pain as it absolves oneself from taking the responsibility for the wealth loss. Selling the investments and move them to more stable assets would prevent the pain from worsening. The mindset turn into ‘how much safety can I get’.
8. These responses are underpinned by one cause – investors lost their minds because they couldn’t emotionally handle the volatility.
9. The emotional turmoil caused by volatility is the price to pay for returns. Yet, investors don’t really know the price until they are presented with the bill. By then, they have already lost their minds.
10. Either investors recalibrate their volatility tolerance or alter their investment choices to stable assets (and not be tempted to switch to risky ones during good times), they will get shocked by the volatility bill again and again.