I am blessed with a number of clients who have been with me for decades. They have heard this message so many times, some of them can recite it from memory!
“Climate” is what you expect, but “weather” is what you get. Just before we moved to Benton County Arkansas, almost 25 years ago, I called the Chamber of Commerce for some statistics about the area. They volunteered that the average daily temperature here is 58.8 degrees. In the first few years we were here, I experienced a day in February when the temperature hit -2 degrees. Not long after that there was a day in August when the temperature was 102! It occurred to me that cold “weather” in the winter balanced by hot “weather” in the summer yields a climate that “on average” is pretty comfortable for me.
Let’s apply the analogy “hypothetically” to the financial markets. If someone told you there was a portfolio mix that yielded an “average” annual return of 8%, would that seem comfortable to you? I know a lot of people who would find that pretty attractive, but some of them would confess they take it to mean they would get an 8% return each and every year. Others, who understand volatility might confess an expectation of getting 9% one year and 7% the next, such that over a period of several years they would receive a statistical average return of 8%. You can probably begin to see how the weather analogy applies. What happens to your comfort level when you discover that in order to achieve the 8% average annual return, you could experience returns significantly higher AND lower than that average? If you are OK with this, we say you embrace the volatility.
Trust me, I could throw out statistics ad nauseam to demonstrate the historical average return of “the market” is SIGNIFICANTLY higher than we’ve experienced so far this year. The same numbers would prove the market return is SUBSTANTIALLY Lower than we realized in 2019.... So, I’m laboring to stress our need to remember that the “weather” of our chosen portfolio will at times be significantly different than the “climate” for which we signed up. Hence the statement, “Climate is what you expect, but weather is what you get.” My clients have taught me the difference between understanding volatility and embracing it. Those who embrace the volatility tend to experience better returns over time.... and a lot less anxiety!
These hypothetical examples are intended as an illustration only and do not reflect the performance of any specific investment. Past performance is not indicative of future returns.