Why don't call it ‘Volatility’
Have you made the all-too-common mistake of referring to this week’s (or this month’s, or this quarter’s) financial market patterns as ‘volatile’?
For years, I thought of the inevitable gyrations we see in the financial markets as ‘volatile’, just as many of my clients did. I used the word ‘volatility’ to describe those sudden, emotion-driven ups and downs in the market that cause some people to think in the short term and start panicking … and others to think in the long term and start looking for bargains. Of course, I knew that there were going to be times when the market was going to move quickly in directions that didn’t always make much sense. I knew that these times were typically referred to as ‘periods of volatility’ Nowadays, though, I am careful never to use that phrase in any discussions with clients.
A few years back, I was having a discussion with a young Financial Advisor named Hayley Pearse at a conference, and I happened to drop in that phrase ‘period of volatility’. Hayley stopped the conversation dead in its tracks and said, ‘Hari, we no longer use that word in our practice, and I strongly suggest that you stop using it, too’.
I said, ‘Really? Why is that?’
‘Think about it’, she said. ‘When you say the word ‘volatility,’ what images come to mind?’
I thought for a moment. ‘Well’, I said, ‘I suppose the main thing that’s volatile besides financial markets are chemicals.’
‘Exactly’, she said, her eyes sparkling with excitement. ‘And what do volatile chemical compounds produce?’
‘Flames. Explosions. Other potentially unpleasant outcomes.’ I nodded my head and smiled. I could see where she was going with this.
‘When we call the markets ‘volatile,’’ she said, ‘what we’re really telling our clients is, ‘Think of this market shift as something complex, dangerous, and explosive, like a chemical combination that’s accelerated out of anyone’s control. Think of it as something that can burn you and injure you’.’
Of course she was right.
Those really are the resonances that connect to the word ‘volatile.’ And they’re completely inaccurate, because market swings (big or small) generally carry just as much opportunity for loss as they do for gain. The market isn’t exploding, nor is it burning down, either, for that matter. It’s just changing, and changing in a way that intelligent investors can understand and learn to plan for.
It’s all a question of your perspective -- and your ability to maintain a disciplined strategy. So that’s why I don’t use that word anymore when I’m discussing shifts in the market with our clients.
I remember asking Hayley, ‘ So what phrase do you use instead?’
A little grin spread over her face. ‘We call it a ‘market wobble.’ Do you like it?’
‘Yes -- I love it!’ I said. ‘But tell me how you and the team settled on that phrase’.
‘Think about it. The phrase ‘market wobble’ brings to mind the image of a wheel wobbling just slightly, and that in turn brings to mind the image of a journey. A journey implies a destination, and a destination connects to the concept of goal-setting. What the phrase ‘market wobble’ summons up is the idea of forward progress toward a specific goal, even though there’s a little bump in the road along the way. But that’s the way it is with journeys. They usually have a bump or two in the road. That’s the way we need to think about shifts in the financial markets, and the way we need to help our clients start thinking about those shifts. By using a phrase like ‘market wobble’ to describe short-term bumps from the long-term growth trend, we can help them to keep their eyes on the prize. The words we use to describe things matter … because it’s the words that guide our thinking and our assumptions!’
Ever since that conversation, everyone in our practice has followed Hayley’s advice. And maybe you should, too.