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FYI: In the 30 years ended 2016, the S&P 500 returned just over 10% per year. Compounding at that rate, fifty grand invested at the start of 1987 would have grown to nearly $875,000 by the end of last year. Not bad. Regards, Ted http://awealthofcommonsense.com/2017/08/managing-sequence-of-return-risk/
Once again, a nice and useful article from Ben Carlson. He notes that volatility is a killer that reduces compound return over time. Not many folks appreciate its wealth eroding impact. How bad is it?
A simple relationship equates compound return to average annual return and return volatility. Here is a Link that shows and discusses that relationship:
Note the negative sign in the equation. Volatility always operates to lower compound return. Volatility and a portfolio's standard deviation are positively related. That tells us how we should construct our portfolio and its sensitivity to our portfolio's standard deviation.
Our goal should be to reduce standard deviation without compromising expected return too much. There's always a price to be paid in these tradeoffs. It's never.easy.
Comments
Once again, a nice and useful article from Ben Carlson. He notes that volatility is a killer that reduces compound return over time. Not many folks appreciate its wealth eroding impact. How bad is it?
A simple relationship equates compound return to average annual return and return volatility. Here is a Link that shows and discusses that relationship:
https://cssanalytics.wordpress.com/2012/03/12/understanding-the-link-between-volatility-and-compound-returns/
Note the negative sign in the equation. Volatility always operates to lower compound return. Volatility and a portfolio's standard deviation are positively related. That tells us how we should construct our portfolio and its sensitivity to our portfolio's standard deviation.
Our goal should be to reduce standard deviation without compromising expected return too much. There's always a price to be paid in these tradeoffs. It's never.easy.
Good investing to all.
Best Wishes