Volatility as Fee not Fine

From Weekly I/O#54

Volatility is the emotional price you need to pay to get high average annual returns. View volatility as a fee, not a fine.

Book: The Psychology of Money

Volatility in the market refers to daily or short-term fluctuations. Stocks have higher volatility than bonds because a stock portfolio can be up or down a few percent any day. People who cannot emotionally handle the high volatility invest in low-volatility assets, which offer lower average annual returns than the stock market over the long term.

Author Morgan Housel viewed volatility as the emotional price you need to pay to get higher average annual returns in the long term. He offers a brilliant analogy for understanding volatility.

"View volatility as a fee, not a fine. If you got a fine for a parking in an illegal spot, you change your behavior and avoid that spot in the future. But if you pay a fee to park in that spot you happily pay the fee if the parking spot was the best parking spot for miles."

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