Volatility kills your long-term returns. Here are 3 portfolios to prove it.
Independent investors (NOT just day traders) should pay more attention to this metric.
Dr. Richard Smith
January 19th, 2023
Blog | Volatility kills your long-term returns. Here are 3 portfolios to prove it.
tl;dr
Independent investors should be tracking volatility—not just hardcore day traders.
High volatility will lower your long-term compound returns.
Use Finiac to lower the volatility in your portfolio.
We talk a lot about volatility here at Finiac. It can feel a little esoteric, I'm the first to admit.
The reason is because, historically, only hardcore traders and hedge fund managers tended to go deep on volatility.
But I'd actually argue that, if anything, it's more important for us individual investors to pay attention to volatility, because we're in it for the long haul. And long-term investing, when you're not trading every day, is where the ups and downs of the market can really eat into your profits.
How volatility kills your long-term gains
These are three different (hypothetical) portfolios that all averaged 10% annual returns over 30 years. They each started with $1,000.
See the impact of volatility on 3 similar portfolios.
But at the end of 30 years, they had vastly different compound returns:
The green portfolio had about $17,000
The blue portfolio had about $15,500
The orange portfolio had about $11,000
So how did three portfolios that all average 10% gains a year end up with such different outcomes? It's because of the volatility:
Green had only 5% average volatility from year to year
Blue had 10% volatility
Orange had 20% volatility
Lesson being: volatility has a cost. It lowers compound returns, because over the course of the 30 years you're investing, you have less money working for you in the markets.
My personal belief is that keeping the us in the high-volatility mode, on this mad roller coaster, is what's happening in financial media and coming from talking heads. I'm talking FTX, Elon Musk—all of that nonsense.
Everybody wanting to drive us crazy, make us lose our minds so that we are jumping around and we have no idea which way to turn. All of it increases volatility—and that volatility has a cost. It lowers our compound returns.
How to lower volatility
When I conceived of Finiac, years ago, it was all about lowering volatility (and therefore risk) in portfolios.
So it'll come as no surprise that that is a core principle of the app today.
Load up your portfolio in Finiac, and the app will tell you exactly how much volatility you're taking on, and how that compares to the market at large.
You can also see volatility tracked asset by asset. Often enough, a few components in your portfolio might be contributing more than their fare share to your overall volatility.
Once you know where that spike is coming from, you can make an informed choice about what to do—perhaps selling a high-volatility asset, or reducing your position size, or putting more money into a low-volatility asset to counterbalance.
We'll never tell you what to invest in (or not invest in). But a metric like volatility—one that was always intimidating or complicated in the past—deserves to make its way into your thinking, now that Finiac makes it easy to calculate.
Don't fall prey to loss aversion
Design better portfolios with Finiac
Related Posts
Put space between the desire to act and action.
Here's a message from Carl Richards that really resonated with me: "When the markets get scary, the single most important thing to do is create space between the des...
Dr. Richard Smith
January 30th, 2023 - 3 min read
The 3 Pillars of Successful Investing
When I’m sitting down to learn something new—something big, like a new language or how to rebuild a car engine—I always like to start with a few principles that brin...
D.R. Barton
January 23rd, 2023 - 6 min read
How to set better money goals in 2023
Something I just learned that blew me away: 45% of Americans make New Year’s resolutions. (12% more than watch the Super Bowl!) Only 8% of those people actually comp...
D.R. Barton
January 17th, 2023 - 5 min read
What is Correlation and Why Should You Care?
Ever used one of these walkways at an airport? If so, you’ll remember what it felt like. Your normal walking pace ramps up immediately, letting you cover more distan...
Justin Davis
January 9th, 2023 - 4 min read
The Santa Claus Rally (and why it didn't work this year)
The Santa Claus rally — traditionally, anyway — stretches across the last five trading days of a calendar year, and into the first two of the next. It’s a reliable c...
D.R. Barton
January 5th, 2023 - 4 min read
6 new features coming to Finiac
Happy new year! Hope it’s treating you well so far. We’re back at it in Finiac HQ and ready to start sharing what we’re building. We’ve talked to a bunch of you, don...
Dan Muse
January 3rd, 2023 - 4 min read
Why you should care about volatility
This is a pretty incredible chart I’ve been looking at recently. These are three different portfolios, showing ten years of performance each, and they all have the ...
Dr. Richard Smith
December 23rd, 2022 - 5 min read
The 200-day Simple Moving Average, Explained
Why a 200-day moving average helps Here’s the problem with a price-over-time chart: two people looking at it can see entirely different things. What’s so complicated...
D.R. Barton
December 22nd, 2022 - 3 min read
How to Calculate Correlation Between Two Stocks
The correlation between two assets—let’s just say stocks, for example—has a huge effect on the amount of risk associated with that investment. Just so we’re clear: I...
Justin Davis
December 16th, 2022 - 4 min read
5 Questions to Ask Before Buying a Stock
Here’s what the decision process looks like for too many investors: Hear about a Hot New Stock! Buy the Hot New Stock! That’s it. Venture too far in the other direct...
Justin Davis
December 12th, 2022 - 5 min read
Is a bull market on the way?
There are plenty of way to tell that a bear market is starting to turn around—but with the economy at large as topsy-turvy as it has been lately, nothing is for cert...
D.R. Barton
December 5th, 2022 - 2 min read
Is it time to abandon crypto?
This is a perfectly reasonable question to ask yourself. Quick recap: FTX’s collapse makes clear the massive negative impact of human shortcomings (logical, ethical,...
D.R. Barton
December 1st, 2022 - 4 min read
The Thanksgiving Market Rally
It’s been 233 years since George Washington first encouraged Americans to take “a day of public thanksgiving and prayer” on Thursday, Nov. 26, 1789 — which, if you’r...
D.R. Barton
November 21st, 2022 - 3 min read
We built a better way to research assets
From the jump, we created Finiac to help individual investors build better portfolios. So, naturally, we started with a killer portfolio-building experience: At-a-gl...
Dan Muse
November 28th, 2022 - 4 min read
Know When to Sell Before You Buy
One question causes more investing anxiety than any other: “When do I buy/sell??” Here’s the answer. This article is part 3 of the series 7 Principles of Successful ...
Dr. Richard Smith
October 14th, 2022 - 3 min read
Investor, Know Thyself
Last week we outlined a strategy for independent investors called 7 Principles of Successful Investing. Try as we might, we couldn’t fit it all into one post, so we’...
Dr. Richard Smith
October 14th, 2022 - 3 min read
Believe in What You Buy
... but make sure someone smarter than you believes in it, too This article is part 2 of the series 7 Principles of Successful Investing. Jump to: Principle № 1 In t...
Dr. Richard Smith
October 14th, 2022 - 5 min read
The Presidential Cycle
“There are three kinds of lies: lies, damned lies and statistics.” — Mark Twain, misattributing Benjamin Disraeli The mid-term U.S. congressional election is behind ...
D.R. Barton
November 14th, 2022 - 4 min read
Article
Why the “Jumbo Fed Hike” Means More Market Volatility
Our co-founder, Dr. Richard Smith, talked about last week’s “jumbo Fed hike” and its effect on the economy overall. Enjoy the excerpt from the conversation above; tr...
Dan Muse
October 15th, 2022 - 3 min read
RiskSmith Update: October 25, 2022
Hi there, Another strong Monday yesterday (S&P 500 ⬆️ 1.2% | DJIA ⬆️ 1.3% | Nasdaq ⬆️ 0.9%) — but as usual, we’re taking a broader view (it’s kind of our brand¹). S...
Dan Muse
October 25th, 2022 - 3 min read