Your Choice: Volatility or Debasement?

“No one likes volatility but the alternative in this particular instance is debasement. And speaking for myself, I would rather have volatility than debasement.”(1)

The challenge for bonds (or any “safe” asset) will continue to be inflation. When we look back on the 2020s it is highly likely that the real return for bonds will be negative. But you like the stability of bonds(#)? Well, if you want stability then there’s a price to pay and that price is negative real returns. Don’t want negative real returns over the next decade? Well, if you want positive real returns then there’s a price to pay and that price is volatility. This is where we find ourselves after 30 years of increasing government intervention in financial markets.

“You can have the momentary short-term discomfort, if you can bear it, of price volatility. If you truly understand what you own, this comfort tends to go away.”(2)

If you truly understand what you own, you have… staying power. Regardless of how other investors behave, regardless of whether other investors lose their minds (which they inevitably do – in both positive and negative directions – from time to time), you understand that price is not necessarily value. And you must have staying power (in some form) to invest long-term, otherwise you’re prone to being another lemming following the herd.

“But price volatility adds uncertainty, and people do feel uncomfortable when something goes down, just as they feel better when it comes back up. However, with an inflationary environment, there’s an absolute certainty that your purchasing power, the stuff you pay your rent with, your purchasing power is getting debased. In the course of five or ten years there can be a far, far larger magnitude of effective loss than whatever your stock performance has been…over a given quarter.”(3)

Just because your business or real estate isn’t quoted on an exchange minute-to-minute doesn’t mean there’s no variation in its value. Conversely, just because a business or real estate asset is quoted on an exchange minute-to-minute, doesn’t mean its value is gyrating wildly.

Keep that in mind when you make your choice: volatility or debasement?



2. Ibid.

3. Ibid.

# Or perhaps relative stability, at least so far in 2022 with bond performance being amongst the worst on record, though if most of your bonds are short-term maturities then the fallout from sharply increasing rates (and therefore falling bond prices) has been more manageable.