Volatility And Portfolio Performance:

It Matters!

A conversation that I often have with clients when we review their portfolio performance comes down to a discussion as to how well their friends have done relative to their own portfolio performance: "they got 10% and I only got 6%". True. "What happens when markets (usually meaning stock markets) go down ?" 

First and foremost, of course, is what annual average return are we trying to achieve that we have built in to your Wealth Forecast? So how much risk do you need / want to take, to get that return? Why take more risk than is absolutely necessary?

If your portfolio has less risk (less potential for volatility), it won't go up as much (as your friend's portfolio), but it won't go down as much either:

A Tale Of Two Portfolio's:

Which portfolio would you rather have?

Both have the same annual average return of 4.00%.

However:

What is actually more important (in this simplified example) is the annual average compound return: if you started Year 1  with $500,000, Portfolio 1 ended Year 5 with $607,137. Portfolio 2 ended with $600,564. Personally, I would rather have Portfolio 1 (would you not all agree?).

The key is the potential swings in year to year returns. The ability to reduce volatility (hopefully limiting or avoiding negative returns), over time, is important. You may give up a few basis points to your friends in the good markets, but in all likelihood they are going to give up more (than you) in difficult markets. Especially if they have a fully invested, balanced portfolio without any tactical advantages.

That is how we do it at High Rock. Although past performance is not a guarantee of future returns, we work darn hard to ensure that we get the best risk-adjusted returns for our clients.

 Over time, that is what pays off!