Managing Volatility

Managing Volatility

Turns out the best investment strategy to grow your wealth, and the best strategy to preserve your wealth, are one and the same: reduce your volatility.

That doesn’t mean accept no volatility and put your money in your mattress. However, a slow and steady investment course holds significant financial advantages over a strategy with breathtaking highs and heart breaking lows. (And you’ll sleep better.)

That is due to a very simple mathematical fact.

Even when the average annual returns of the three strategies are the same—shown here as 8% for each—the steadier course earns you almost 9% more over the three year period. Frankly, we do not strive to beat the market as it hits new highs. However, we expect to lose less in falling markets and earn you the smoother, more predictable returns you deserve over time.

Steadier Income

The benefits of the slow and steady approach are even greater if you need to pull current income from your investments. This is because you are less likely to be withdrawing income when your portfolio is down significantly. Additionally, if you take a fixed percentage of your portfolio each year, a steadier principal ensures a more reliable income stream. This helps with budgeting. The table below shows how the consistent 8% return of Investment C allows for a more predictable annual withdrawal. Finally, lower volatility and steadier withdrawals help your investments grow over time—something that the largest, most sophisticated endowments and the wealthiest families, have known for a long time. (Read more here.)