22 May 2019
I certainly like the idea of defining volatility in terms of whether you reach your investment goal, rather than short- term volatility. The former risk relates to permanent loss of capital – if you fail to achieve your goal then the shortfall is one you can never make up. Short-term volatility on the other hand should simply be viewed as a cost of seeking to achieve your long-term goal rather than a risk to be avoided – unless you have an absurdly unambitious goal your portfolio will always have its ups and downs from year to year.
Bentley commented, “Depending on what kind of client you have – whether you’re in the accumulation phase or whatever you want to call it – volatility can essentially disappear over time. If you measure volatility by the degree to which your end result varies from what you might expect it to be, then that is purely the case. Explain that markets do go up and down and then find a way to give exposure to those markets in a sensible way – try to control it in the context of the risk that someone is prepared to take”.
While I commend the panellists’ views in relation to their proposal to adopt a healthier definition of volatility, I wonder if their comments require some qualification. Are they right to suggest that ‘volatility can essentially disappear over time’? The nub of their argument appears to be that while short-term ‘risk’ can be material, risk over the long term tends to zero.