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.

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Dr. Richard Smith

January 19th, 2023

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Blog | Volatility kills your long-term returns. Here are 3 portfolios to prove it.


  • 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.

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.

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