VOLATILITY – WHY IT MATTERS – ANSWER

And the winner is: Portfolio C

Portfolio Year 1 Return Year 2 Return Total 2-Year Return Winner
A +19% -16% -0.04% No
B +10% -9% +0.10% No
C +5% -4% +0.80% Yes

Did you choose correctly? Are you surprised? Whether you got it correctly or not, one has to be impressed that gaining 19% one year and losing only 16% in the following year will result in an overall loss. Repeated for multiple 2-year periods will result in losing all of your investment.

Even though the absolute difference in returns for Portfolio A (+19, -16) is three times that of Portfolio C (+5, -4), the lower volatility inherent in Portfolio C’s returns make it the winner.

Here’s an easy-to-read article that explains why funds with lower volatility outperform.

Back