Riding the Market Rollercoaster:

10 years later and here we are again....

The Power of Patience in Volatile Markets

In volatile markets, which can be like a roller coaster, the only real way to get hurt is to jump off. As long as you remain in your seat and keep your arms inside the vehicle, you can ride out even the most tumultuous market conditions. This timeless wisdom holds true through every market cycle—but comes with an important caveat.

The Foundation: A Quality Portfolio

This strategy only works if you have a diversified portfolio of quality businesses that you can dependably rely on to make it to the finish line. If your portfolio is full of risky, highly leveraged businesses or lacks proper diversification, it can be the equivalent of having the roller coaster rail ripped from the track halfway through the ride. In such precarious situations, jumping off might seem like your best option.

Even then, caution is warranted. Things are rarely as bad as they initially appear during market turmoil. The more prudent approach is building a properly diversified portfolio—either through index funds or a carefully selected group of 10 to 20 quality businesses with diverse underlying fundamentals—that is designed to carry you safely to your financial destination.

April's Market Volatility: A Case Study

Recent market behavior provides a perfect illustration of this principle. In April, we witnessed extreme volatility with the market dropping 15% from the beginning to the middle of the month, only to recover and finish down less than 1%. This remarkable turbulence included the market losing over 10% in just two days before regaining it in one.

Investors who panicked and sold during this downturn effectively jumped off the roller coaster midway through the ride—a guaranteed way to sustain financial injury. Those who remained seated emerged relatively unscathed despite the wild ride.

The Peril of Portfolio Hopping

Over the long term, whether at the portfolio or individual equity level, jumping from position to position is typically unwise. Abandoning one roller coaster for another in hopes of avoiding discomfort often leads to peril. This doesn't mean adjustments are never warranted, but they should be infrequent and made only when there's high probability of serious structural problems ahead—not simply because the track momentarily disappears from view.

The Asymmetric Mathematics of Returns

The mathematics of investment returns creates an asymmetric relationship between losses and the gains needed to recover them. This reality makes market timing even more dangerous than it initially appears.

Consider what happened to investors who abandoned the market this April:

• Best case scenario: They bought back at the very bottom and realized a 10-15% gain.

• Worst case scenario: They sold at the bottom, locking in a 10-15% loss.

The problem is that recovering from losses requires disproportionately larger gains. If you've lost 15% of your capital, you don't need a 15% gain to break even—you need approximately 17.6%. This mathematical reality means that the ultimate measure of a portfolio is how it performs during downturns, as recovering afterward is mathematically far more challenging than simply foregoing some upside.

The Bottom Line

Market volatility is inevitable. Building a portfolio of quality investments and having the discipline to stay the course through turbulence are the keys to long-term investing success. Remember: on the market roller coaster, the injuries come not from the ride itself, but from jumping off before reaching your destination.

"The ultimate measure of a portfolio is how it performs in a downturn."