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Portfolio Volatility

Why the ride along the way matters!

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Two portfolios can produce the same conventionally measured rates of return over time. BUT, if investors are withdrawing funds along the way, investment outcomes can be quite different.

Shown below is a table presenting 10 years of sample returns for two sample portfolios. The first portfolio experiences significantly more return volatility during the 10 years compared to the second portfolio.


Annual Return

Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10


More Volatile Portfolio

-18.6%
-23.1%
-23.9%
36.8%
18.6%
32.4%
47.2%
27.7%
-52.8%
78.1%


Less Volatile Portfolio

9.2%
5.1%
7.9%
4.5%
3.2%
2.2%
4.4%
3.4%
-0.1%
10.2%

Conventionally measured compound annual return:


More Volatile Portfolio

4.9%


Less Volatile Portfolio

4.9%

Annuity withdrawal annualized return:

($100,000 starting balance, $5,000 withdrawn at end of each year)


More Volatile Portfolio

2.1%


Less Volatile Portfolio

5.1%

Annuity withdrawal ending portfolio value:


More Volatile Portfolio

$67,797.00


Less Volatile Portfolio

$101,252.00

Source: “Measuring Stick”, Craig Israelsen, PhD, Financial Planning Magazine, January 2011