A Study in Volatility
At Gill Capital Partners we spend considerable time discussing the potential adverse impact of volatility with our client’s assets. High return investments look extremely attractive until you consider the impact the downside volatility adversely affecting your ability to compound money. We thought we would share with you a simple story of the Tortoise & Hare. In the following example, the fast-moving Hare has a 36 year average return of 10%. The slow-moving Tortoise has a 36 year average return of 8%? Which one would you choose? If you opted for the Hare, you, like many investors, have underestimated the impact of volatility on a portfolio value. The term volatility indicates how much and how quickly the value of an investment, market, or market sector changes. The hypothetical example here, which repeats the six-year pattern of returns over 36 years, clearly shows the value of slow but steady Tortoise wins out when it comes to growing a portfolio.
|
Year |
Hare |
Total |
Tortoise |
Total |
Difference |
|
1 |
20% |
$120,000.00 |
8% |
$108,000.00 |
-$12,000.00 |
|
2 |
30% |
$156,000.00 |
12% |
$120,960.00 |
-$35,040.00 |
|
3 |
-20% |
$124,800.00 |
4% |
$125,798.40 |
$998.40 |
|
4 |
50% |
$187,200.00 |
20% |
$150,958.08 |
-$36,241.92 |
|
5 |
30% |
$243,360.00 |
12% |
$169,073.05 |
-$74,286.95 |
|
6 |
-50% |
$121,680.00 |
-8% |
$155,547.21 |
$33,867.21 |
|
7 |
20% |
$146,016.00 |
8% |
$167,990.98 |
$21,974.98 |
|
8 |
30% |
$189,820.80 |
12% |
$188,149.90 |
-$1,670.90 |
|
9 |
-20% |
$151,856.64 |
4% |
$195,675.90 |
$43,819.26 |
|
10 |
50% |
$227,784.96 |
20% |
$234,811.08 |
$7,026.12 |
|
11 |
30% |
$296,120.45 |
12% |
$262,988.40 |
-$33,132.04 |
|
12 |
-50% |
$148,060.22 |
-8% |
$241,949.33 |
$93,889.11 |
|
13 |
20% |
$177,672.27 |
8% |
$261,305.28 |
$83,633.01 |
|
14 |
30% |
$230,973.95 |
12% |
$292,661.91 |
$61,687.96 |
|
15 |
-20% |
$184,779.16 |
4% |
$304,368.39 |
$119,589.23 |
|
16 |
50% |
$277,168.74 |
20% |
$365,242.07 |
$88,073.33 |
|
17 |
30% |
$360,319.36 |
12% |
$409,071.11 |
$48,751.75 |
|
18 |
-50% |
$180,159.68 |
-8% |
$376,345.42 |
$196,185.74 |
|
19 |
20% |
$216,191.62 |
8% |
$406,453.06 |
$190,261.44 |
|
20 |
30% |
$281,049.10 |
12% |
$455,227.43 |
$174,178.32 |
|
21 |
-20% |
$224,839.28 |
4% |
$473,436.52 |
$248,597.24 |
|
22 |
50% |
$337,258.92 |
20% |
$568,123.83 |
$230,864.91 |
|
23 |
30% |
$438,436.60 |
12% |
$636,298.69 |
$197,862.09 |
|
24 |
-50% |
$219,218.30 |
-8% |
$585,394.79 |
$366,176.49 |
|
25 |
20% |
$263,061.96 |
8% |
$632,226.37 |
$369,164.42 |
|
26 |
30% |
$341,980.55 |
12% |
$708,093.54 |
$366,112.99 |
|
27 |
-20% |
$273,584.44 |
4% |
$736,417.28 |
$462,832.84 |
|
28 |
50% |
$410,376.66 |
20% |
$883,700.74 |
$473,324.08 |
|
29 |
30% |
$533,489.65 |
12% |
$989,744.83 |
$456,255.17 |
|
30 |
-50% |
$266,744.83 |
-8% |
$910,565.24 |
$643,820.41 |
|
31 |
20% |
$320,093.79 |
8% |
$983,410.46 |
$663,316.67 |
|
32 |
30% |
$416,121.93 |
12% |
$1,101,419.71 |
$685,297.79 |
|
33 |
-20% |
$332,897.54 |
4% |
$1,145,476.50 |
$812,578.96 |
|
34 |
50% |
$499,346.32 |
20% |
$1,374,571.80 |
$875,225.49 |
|
35 |
30% |
$649,150.21 |
12% |
$1,539,520.42 |
$890,370.21 |
|
36 |
-50% |
$324,575.11 |
-8% |
$1,416,358.79 |
$1,091,783.68 |
|
10% |
8% |
Average Annual Return |
|||
The Hare falls behind because of the mathematics of gains and losses. It doesn’t take 50% to recover from a 50% loss. It takes 100%! Sometimes it’s not how much you make, but how much you don’t lose.
This is a hypothetical example to illustrate the impact of volatility on a portfolio and does not represent the actual returns of any index or managed portfolio. There can be no assurance that any portfolio will match the returns show here. All investments have the potential for loss as well as gain. Past performance is not indicative of future returns.