01 September 2022

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The fascination with volatility

Author: Luigi Campopiano

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The squint of Venus is a small defect that adds charm to the look (it takes its name from Botticelli's painting, The Birth of Venus: the eyes of the goddess of beauty are not aligned). Precisely because it is very light, this defect has its own particular charm: the eyes cannot fix the same point simultaneously.

Part of the Italian savers have brought this defect in the field of investments: they cannot see the financial markets with the same eyes, so the fluctuations (positive and negative) are not seen and evaluated with the same yardstick, which ends up distorting the look, and this is devoid of charm.

After more than a year of growth for all markets (equities and bonds), volatility has returned since the beginning of the year: inflation (also impacts bonds) in Europe and the USA, the slowdown in China, rise in prices of gas and oil, shortage in the supply of some goods. In short, many elements have brought tension to the markets.

Going back to Venus' squint, when the deviation increases dramatically, it assumes a pathological aspect and loses all its beauty: and what happens? That many, even in the wake of the news screamed by the newspapers, begin to write and call in a panic asking if it is time to sell everything and get in liquidity (to have this squint in the evaluations are always the same ones who have already done so maybe in 2001-02, in 2007-08, and then in 2011-12 and last year. And every time they made a mistake, they went out of the market, and they were out when it, punctually and unexpectedly, rebounded, ending up losing yet another occasion. Unfortunately, the press also has part of the blame.

If you don't agree to see fluctuations, you shouldn't invest. The problem is that those who invest know very well that not losing money is essentially impossible (anyone with a past as an investor in the financial markets has had their losses): you have to endure the famous "drawdowns" of the market because it is the norm and not the exception and is the famous "price" to be paid to obtain the greater long-term gains statistically brought by shares compared to bonds and liquidity (in the long term, shares have delivered to their holders higher returns than bonds in the order of 4, 5% for each year: it is the so-called "risk premium" which compensated investors for having endured greater volatility and greater falls in prices at certain times).

There have been moments of high volatility; there are and always will be. The gains have arrived, but it is worth remembering that they are not guaranteed and that, therefore, great clarity of purpose and the ability to tolerate negative market movements are needed; on the other hand, there is no alternative. In short, to have a return, you have to accept volatility.