By President & CEO, Dan Kraninger

“Volatility is not the same thing as risk, and anyone who thinks it is will cost themselves money.” -- Warren Buffett

Imagine you buy a house in a great location for what you believe to be a reasonable price after studying the area’s demographics and pricing trends. The purchase becomes the bedrock of your assets. You probably stop looking at purchases and sales in the newspaper because you don’t care. This is your home and you intend to be there a while. Since you did your homework up front, you feel comfortable, and you go about living your life.

Now imagine the house comes with hourly alerts. Digital price tags texted to your phone that uptick and downtick based on peoples’ opinions of your home’s value. Air conditioner breaks, kids skin their knees on the driveway, business leaving town – all downticks. New house being built, local school wins baseball state title, neighbor plants some nice bushes in front yard – all upticks. How would this change your attitude?

My guess is your emotions would get flowing – especially when some ticks positive or negative started occurring in a row. $500,000 . . . $499,630 . . . $499,120 . . . $498,770 and that’s just in the last four hours.

All assets fluctuate in price. Change in price is measured by volatility and often it’s volatility that causes people to second guess their investment decisions. Those second guesses are what Buffet is referring to in the quote above.

When it comes to investable securities, we have done the homework and understand the difference between volatility and risk. The market today is working through a period of little return and higher volatility. It’s ok because these price fluctuations are necessary to garner higher rates of return than low volatility assets (think cash) over time. The risk of serious decline (-20%+) looks improbable given our level of domestic economic activity, current investor fear, and valuations. Anyone who can make the mental switch – think of an investment strategy to be closer to a home purchase and treat it as such, in my mind, will be much better off in the long run.