Have you ever been on a rollercoaster? In the car, every drop feels like you're about to crash. But if you look at the ride from a distance, you can see the track climbs overall. The stock market is a bit like that.
What is volatility?
Volatility is how strong the bumps are: how much a price moves up and down. A savings account barely moves. Shares, on the other hand, can gain 20% one year and lose as much the next.
These bumps aren't a flaw: they're the price of the ticket. If shares earn more than a savings account over the long run, it's precisely because you have to accept a bumpy ride.
The more you look, the more you worry
Let's take a simplified model: an investment that returns 7% a year on average, with the kind of bumps typical of shares. What are the chances of seeing a loss when you check your account?
- if you check every day: about 49% of the time you see red;
- every year: about 33%;
- every 10 years: about 8%;
- every 20 years: less than 3%.
The investment is the same. Only how often you look changes. Someone who checks every day gets bad news almost every other day.
The fear of losing
Researchers Shlomo Benartzi and Richard Thaler (Nobel Prize 2017) explained why so many people avoid shares. Two reasons add up:
- A loss hurts about twice as much as a gain of the same size feels good. Losing 100 francs affects us more than winning 100.
- We look too often. Every glance reveals small losses that make us suffer… and push us to sell at the worst moment.
They called this "myopic loss aversion": being afraid of losses and not seeing past the end of your nose.
How to stay in the car
- Decide before you get on. Only put money into shares that you won't need for many years.
- Look less often. Once or twice a year is plenty for a child's money.
- Mix it up. A bit of tortoise (bonds), a bit of hedgehog (gold), and the car shakes less.
- Don't jump off mid-ride. Those who sell on the way down often miss the climb back up.
Try this tonight with your child
Roll a die 20 times. Every 1 or 2, the "stock market" loses a point; every 4, 5 or 6, it gains a point; a 3 changes nothing. Draw the line point by point: it zigzags… but climbs. Then ask: "If you'd only looked at the end, would you have been scared?"
Further reading
- Benartzi, S. & Thaler, R. H. (1995). Myopic Loss Aversion and the Equity Premium Puzzle. Quarterly Journal of Economics, 110(1), 73–92.
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Educational content, not investment advice. Past returns do not guarantee future returns. The probabilities shown come from a simplified model (7% average return, 16% volatility) and are not a forecast.