Harry Potter and the Return of Investment Volatility

The first quarter of 2018 had two distinct chapters to it.  The first chapter lasted through January with a surge in market valuation.  The second chapter introduced volatility into the story, a character we hadn’t heard from in quite some time.  I want you to consider this point; many people assume volatility is a villain in the investing plot.  I want to ask each reader to consider the opposite.

My wife and children are Harry Potter fans.  They’ve read the series and have seen all the subsequent movies (I’ve seen the first four movies and have been told about the rest!).   In the Harry Potter story, a primary and beloved character is Professor Dumbledore.  Dumbledore is the headmaster of Hogwarts for most of the series and founder of the Order of the Phoenix, an organization created to fight Lord Voldemort, Harry’s main antagonist.

On the other side, is the not-so-beloved Professor Severus Snape.  He is seemingly hostile to Harry Potter throughout.  Harry’s biggest nemesis is Lord Voldemort.  Snape appears to be loyal to Voldemort for much of the story, but in the seventh book, Snape’s true loyalties are revealed upon his death.  He was a close friend of Harry’s mother and turned on Voldemort after the latter sought to kill her.

Snape is a multi-layered antagonist whom JK Rowling refers to as an antihero¹.  She has suggested during interviews that, “The series is built around the Dumbledore and Snape storylines.”  I will suggest that Dumbledore is akin to market returns.  Everyone likes positive returns, and they are what is talked about when it comes to capital market discussions.  Snape, as you can see in my analogy, is akin to volatility² and risk³.  Investment markets, like great stories, cannot have good (positive returns) without bad (uncomfortable price swings and the chance that if you pick a bad stock that you will lose your money)⁴.

The markets’ rise during the last several years has been remarkably calm.  In 2017 and the first quarter of 2018, I’ve shared with readers that a return in the storyline of volatility is inevitable, just as Professor Snape appears at seemingly inopportune times for Harry and his friends.  But in the end, the story doesn’t work, and good isn’t distinguished from bad (investments to make or with craft world order!) without both.  And sometimes, the character we think is the antagonist ends up doing good in the end.

I want to ask each reader to reflect on their thoughts about volatility.  It may “feel” distressful as you move through your investment story, but it is normal, necessary, and in the end, a primary component of the investing story.

1. Antihero is a central character in a story who lacks conventional heroic attributes.  Clearly this can be attributed to investment volatility when one properly understands capital markets.
2. A simple definition of Volatility is the rate at which the price of a security increases or decreases over time.
3. A simple definition of Risk is the chance of loss.  Note that volatility and risk are not the same.
4. Voldemort is bad, not Professor Snape.  Erratic investment behavior is bad, not the intermittent price swings of good investments.

Author: David Jeter, CFP^® | Partner and Financial Advisor | Allegheny Financial Group | March 2018

Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.