Dealing with market declines is all about perspective

Morgan Housel shares a simple framework for dealing with volatility.

If the stock market falls 10% — which it just about has in recent months — there are 2 ways to view your losses:

  1. As a fine. A fine means you did something wrong. You’re in trouble. You made a mistake. Shame on you, don’t do it again.
  2. As a fee. A fee is just a cost you pay to get something nice in return. You’re not in trouble and you didn’t make a mistake. You’re just paying the normal cost of admission.

Virtually all market declines are fees

Stock markets are capable of generating wealth over time, but the gains aren’t free. You have to pay the cost of admission, which is a constant chain of volatility, uncertainty, and the occasional big decline.

But so many investors view declines as fines — indications that they did something wrong. They set out to fix the problem by trying to learn their mistake or find someone to blame, or worse, selling.

They think they’re doing the right thing. But so often, they’re doing the investing equivalent of canceling their vacation when they find out the hotel charges a reasonable and affordable fee.

Everything nice has a price…

… and the key to a lot of things with money is just figuring out what that price is and being willing to pay it.

The trick to investing is convincing yourself that the fee of volatility is worth it. That, I think, is the only way to deal with volatility — not just putting up with it, but realizing that it’s an admission fee worth paying.

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