The Relevance of Temporary Price Fluctuations
In addition to the probability of permanent loss attached to investment, there is also the possibility of interim price fluctuations that are unrelated to underlying value.
Many investors consider price fluctuations to be a significant risk: if the price goes down, the investment is seen as risky regardless of the fundamentals.
But are temporary price fluctuations really a risk?
- Not in the way that permanent value impairments are and
- then only for certain investors in specific situations.
It is, of course, not always easy for investors to distinguish temporary price volatility, related to the short-term forces of supply and demand, from price movements related to business fundamentals. The reality may only become apparent after the fact.
While investors should obviously try to avoid overpaying for investments or buying into businesses that subsequently decline in value due to deteriorating results, it is not possible to avoid random short-term market volatility.
Indeed, investors should expect prices to fluctuate and should not invest in securities if they cannot tolerate some volatility.