A distinction must be made between volatility and risk.

Volatility and risk are very different things, but when stock prices exhibit volatility, investors (long and short-term) tend to perceive risk. What is often overlooked by long-term investors is that avoiding volatility over long periods of time can be the biggest risk of all.

“Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions.”

Bad investor behaviour is very risky.

Long-term stock investors get fixated on avoiding losses while earning excess profits, resulting in them taking unnecessary risks. This behaviour is influenced heavily by triggers from the media, mutual fund companies, and social interactions with family and friends.

“Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.”

Finding a good active manager is nothing more than a gamble.

Active managers do occasionally succeed, over both the short-term and the long-term. When choosing to pursue an active strategy, one of the biggest challenges for an investor is picking a manager that will have continued success. Every manager, fund, and fund company has a sales pitch (Dynamic Funds: Don’t hug the index. Beat it into submission.), and powerful motivation to convince investors to hand over their money.

“There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing.”

Despite being cited often as living evidence that active management can be successful, Buffett has long agreed that low-cost index funds give investors the best probability of success in creating and preserving wealth.