A Word on Volatility
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By Ben Dolan, CFP®
You can’t invest without risk. Future results are uncertain. These are facts investors rarely want to face, even when they know them to be true. Credit risk, inflation risk, market risk (and there are many more) are accepted by investors when they freely participate in capital markets.
Despite the anxiety caused by accepting risks inherent to investing, those that take a long-term approach to investing in capital markets have been generously rewarded for doing so. But not all returns are the same. There are many ways returns can be eroded. Trading fees (frictional costs), advisory fees, loads (sales charges), and expense ratios will all have an impact on your net return.
Volatility, the ups and downs of the price of a security based on supply and demand, will also have an impact on returns. A good example of the impact of volatility is provided by Daniel Goldie and Gordon Murray in their book, The Investment Answer. The chart below (Figure 2-1 on page 26 of The Investment Answer) outlines two portfolios with the same average return of 10%. One portfolio is low volatility, while the other is high volatility.
While the average return for each portfolio is the same, the compound return is not. Therefore, the ending balance of the portfolio in year 10 is not the same.
Managing a portfolio effectively means understanding volatility and the relationship between different asset classes. Some asset classes are highly correlated (tend to move together during market events), while others are uncorrelated (move independently), and others negatively correlated (move in the opposite direction). The mix of assets classes in a portfolio and their correlation will result in more or less volatility, and varying compound returns.
Understanding the relationship between asset classes, and controlling volatility, is crucial to successful investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The market and economic data are historical and are no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information in this report has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness.
Nothing in this material should be construed as investment advice offered by Dolan Capital Advisors, Inc. This market commentary is for informational purposes only and is not meant to constitute a recommendation of any particular investment, security, portfolio of securities, transaction, or investment strategy. No chart, graph, or other figure provided should be used to determine which securities to buy, sell or hold. No representation is made concerning the appropriateness of any particular investment, security, portfolio of securities, transaction, or investment strategy. You should speak with your own financial professional before making any investment decisions.
Past performance is not indicative of future results. Dolan Capital Advisors, Inc. does not guarantee any specific outcome or profit. These disclosures cannot and do not list every conceivable factor that may affect the results of any investment or investment strategy. Risks will arise, and an investor must be willing and able to accept those risks, including the loss of principal.
Certain statements contained herein are statements of future expectations and other forward-looking statements that are based on opinions and assumptions that involve known and unknown risks and uncertainties that would cause actual results, performance, or events to differ materially from those expressed or implied in such statements.
Ben Dolan and Michael Foster are investment advisor representatives of Dolan Capital Advisors, Inc., a SEC-registered investment adviser. Investment advice offered through Dolan Capital Advisors, Inc.