Volatility Doesn't Equal Loss - Unless You Sell

We would like to share with you, the article below published a few days ago by Oppenheimer Funds.

Volatility Doesn't Equal Loss - Unless You Sell 

August 26, 2015


By Paul Blease, Director of CEO Advisor Institute; Brian Levitt, Senior Investment Strategist

One of the core principles that all successful long-term investors must exercise on a regular basis is the principle of courage. Without courage you will achieve nothing in life worth having, personally or professionally. Volatility is the market’s way of testing your level of commitment and courage. A Roman author in the 1st century BC captured this perfectly: “Anyone can hold the helm when the sea is calm.”

The historically above-average returns of the stock market only come to those capable of exercising courage. Everyone else should simply park their assets down at the local bank, where an annual erosion of purchasing power is virtually guaranteed.

By the way, volatility does not equal loss, unless of course you sell! Author Nick Murray nicely summarizes this concept when he writes that “the ability to distinguish between volatility and loss is the first casualty of a bear market.” Mr. Murray reminds us how the legendary buy-and-hold investor Warren Buffett handles volatility:

  • Buffett suffered a “loss” (i.e., a paper loss1) of $347,000,000 on October 19, 1987— but he didn’t sell.

  • In the 45 days between July 17 and August 31, 1998, he suffered a “loss” of $6.2 billion—but didn’t sell.

  • Finally, between the market peak of October 2007 and trough of March 2009, his “loss” totaled about $25 billion—yet, of course, he didn’t sell even then.

  • When asked by a CNBC host how it felt to have “lost” 40% of his lifetime accumulation of capital, he said it felt about the same as it had the previous three times it happened.

There is much we can learn from the “Oracle of Omaha,” not least of which is the above!

Market corrections happen often and even in good years, including fairly significant intra-year declines in recent years of strong returns, such as 2010 and 2012 (Exhibit 1).

Exhibit 1: Volatility does not equal loss unless you sell

Source: Bloomberg, as of August 25, 2015.

  • From 1981 to 2014, the S&P 500 Index, a broad-based measure of U.S. stock performance, has experienced at least a 5% intra-year decline in every year but one. The average intra-year decline over the past 34 years has actually been 14.4%.

  • But notice the following: Equities have still posted positive returns in 26 of those last 34 years with annualized total returns over that period of more than 11%.

Remember the bottom line: Market corrections do not equal financial loss…unless you sell.

  1. A paper loss is an unrealized capital loss in an investment. It is calculated by comparing the market price of a security to the original purchase price. Losses only become realized when the security is sold.



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