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My Daughter is Monster: Volatility at Home and in the Marketplace

Monster energy drink and my 12-year old daughter—a closer look at short-term market volatility and adopting a long-term outlook on your investments.
My Daughter is Monster: Volatility at Home and in the Marketplace

As a financial advisor, I review a lot of data and read many articles about investing on a daily basis. Over time, I’ve seen the financial press beat their chest repeatedly about recessions, bear markets, monetary policy, fiscal policy, falling interest rates, rising interest rate, GDP growth projections being good and not good enough, how to be like Elon Musk, how to be like Warren Buffett, how Elon Musk is like Warren Buffett, and on and on and on.

Trends in financial topics come and go, but recently I have noticed a sharp uptick in articles about something that is likely here to stay: market volatility. 

I’ll give people the benefit of the doubt and assume that most of us understand that markets can be extremely volatile. However, the key to understanding how to manage volatility in our behaviors (and thus our portfolios) is often hard to quantify in understandable, non-jargony terms. Not everyone knows what standard deviation is, or what the VIX is doing right now. So, to put market volatility into perspective, I thought that I would attempt to discuss volatility in terms we all might appreciate, which is a discussion of the performance over time of one of my most valuable investments: my 12-year old daughter.

My daughter is bright, gregarious, artistic, thoughtful, polite, and intellectually curious. All in all, she has all of the characteristics of an excellent investment for the betterment of our society and the human race overall. However, for purpose of the journey of holding on to said investment, she also happens to be in middle school. Even if you do not currently have a child in middle school, I’m sure you can recall your middle/junior high school days. I feel safe in predicting it was not exactly the most serene and enjoyable time in your life. Even the most positive, benign interactions with my daughter can turn on a dime.

Witness the sign that I found on the door to her room the other day:

Daughter's sign

This is clearly a sign of significant volatility in my investment. I asked myself how this type of situation would apply to the real world of investing.

Thankfully, the answer came when I was watching a presentation from financial planning guru Morgan Housel. He very clearly identified the single investment that most related to volatility and my daughter: Monster Beverage.

You see, over the last 20 years, Monster Beverage has been one of the highest performing single stocks in the U.S. stock market. Over this period, Monster Beverage returned more than 200,000%.

Monster energy drink gains 
 As you can see in the graph above, which originally appeared in Morgan Housel’s presentation at the MicroCap Leadership Summit earlier this year, Monster Beverage has had an incredible 20-year run.

A graph like this might tempt you to ask yourself, “what if I had invested x amount in 1995?”

Well, what if you had?

The ride would have been significantly bumpier than the graph above suggests. In fact, you would have experienced the following, as shown by another of Mr. Housel’s slides:

 Monster energy drink volatility 

This graph clearly shows that one of the highest performing stocks looks like it was murdered time and time again. The graph ignores all gain showing only the percent decline in the value of stock relative to the highest point. Over the last 20 years, Monster Beverage fell by 70% once, by 50% six times, and by 30% at least a dozen times. If you had held Monster Beverage during this period, would you have been able to fight the reaction to sell during times of market stress?

Holding a stock as it loses 70% of its value is no easy feat.

If you were able to hold on to Monster during this type of volatility it is likely that you either weren’t paying attention (Ignorance is bliss, no?), or you somehow avoided reacting emotionally to an immense amount of market pressure through discipline. If it was the latter, then you are my kind of investor.

Since we can expect volatility to continue into the future, there are steps that investors can take to maximize their investment experience. First, identify your tolerance for volatility in your portfolio and work with your advisor to select investments that are tailored specifically for your situation. Second, adopt a long-term outlook with your investments, which will make it easier to accept short-term volatility without undue stress. Far too many people look at the stock market as a source to make short-term gains. In the stock market, time is your greatest ally, and it is one of the only market variables within our control (unlike with our children).    

Monster Beverage’s journey over the past twenty years is just one extreme example of volatility in the marketplace. Quite frankly, volatility is an unavoidable part of investing.

In the marketplace, volatility is the price you pay for market return. 

Consider it the cost of admission to a healthy, functioning financial system.

The following image, created by Carl Richards at the Behavior Gap, illustrates this concept well:     

Behavior Gap

As my daughter navigates the ups and downs that accompany adolescence, I choose to adopt the long-term view towards her development. She is, without a doubt, my greatest investment, and as with any investment, there will be volatility.

I cannot predict when, where, or even why the volatility will occur, but I can do everything I can to prepare myself to keep a long-term outlook when it inevitably surfaces.

Only then will I be able to manage the stress of the downside while enjoying her wonderful upside. The minus-70% days will be rough, but without them, the plus-211,000% gains would not be possible. 

If you can relate to this, please tune in for my next article, when I discuss asset diversification strategies by comparing them to the time when my wife had twins… 

 

About the Author

Peter Allen, JD, CTFA

Peter Allen, JD, CTFA
Executive Vice President | Asset Management
Walla Walla

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