Peter Lynch was one of the greatest investors of all time. In this 1994 excerpt he shares advice on how to deal with stock volatility. We will elaborate on Lynch’s points and demonstrate examples of how you can apply his advice within your own investment portfolio.

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As Peter Lynch described, volatility on its own isn’t a bad thing and can actually be a powerful tool for improving investor returns, as long as you have a strong stomach.

Now when we discuss volatility regarding stocks, there are usually two main discussions: price volatility of an individual stock and price volatility of the stock market or an entire investment portfolio.

Regarding individual stock price volatility, it is important to understand the difference between price and value.

While the stock price can change very quickly in the market day to day, the underlying value of the business is usually much more stable and easier to predict. This can potentially allow for opportunities when the stock price declines below what you think the company is worth.

If the fundamentals of a company haven’t changed and the only thing that has changed is the stock price, then if you liked the company $24, you should love it at $17.

For most quality companies, stock price volatility that creates meaningful price declines are often seen as great buying opportunities in hindsight.

If you are a long term investor, you will be better off in the long run because of volatility of individual stock prices as it allows you more chances to buy at attractive prices.

We saw this exact occurrence in March of 2020 during the peak of uncertainty and volatility.

As an actual example from my own experience, I had bought Discover Financial stock (DFS) in later February 2020 for about $70 per share. Then in a matter of weeks, the stock declined to under $25, the lowest the stock had been since 2011 (over nine years ago)!

While I could have been upset that the price of my initial investment had fallen by more than half, I used this as an opportunity to significantly increase my position by buying much more DFS stock at $35 and a bit at $50. Eventually as the volatility and uncertainty subsided, the stock price began to rise and converge with its actual intrinsic value.

When thinking about the volatility of your entire portfolio, there are a couple aspects that make it different than the volatility of an individual position.

One, is that when an individual stock goes down, you can use some cash, either from your income or as a cash reserve in your portfolio, to then buy that stock if you think it is a good value. And if you didn’t have cash available, you could sell or trim another position to raise cash.

However, when your entire portfolio experiences price volatility, unless you have a cash set aside specifically for a drawdown, you might not have much potential to take any action beyond new contributions from your income. And if you are withdrawing from your portfolio (and no longer contributing), your actions may be limited to cutting expenses to minimize further reductions in portfolio value during the drawdown.

This leads to the second distinction which is that declines in your total portfolio likely will have a greater mental and emotional impact than a single stock decline. It is especially taxing if you don’t have the stomach or risk tolerance to handle significant declines in your entire portfolio.

Decide if you would prefer to take actions to reduce the price volatility of your overall stock portfolio by including other assets (gold, cash, etc.)

Decide if you are willing to embrace volatility in pursuit of higher potential returns, understanding that there will be periods of price decline and underperformance.

Once you understand volatility, you will come to expect it. You will know longer be surprised by it and should not be concerned with it, as you have already decided on the actions you will take in your long term portfolio.

For most, that will be tuning out the noise as much as possible and continuing to add to positions in quality companies and assets when prices are down. This strategy works for individual stocks, index funds, and other assets as well.


DISCLAIMER: This video is a resource for educational and general informational purposes and does not constitute actual financial advice. No one should make any investment decision without first consulting his or her own financial advisor and/or conducting his or her own research and due diligence. There is no guarantee or other promise as to any results that may be obtained from using this content. Investing of any kind involves risk and your investments may lose value.


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