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The Online Advisor - March 2000
Volatility can diminish your investment returns
If you have investments in the stock market these days, you know what volatility is all about. Wide swings in the market can give you a big increase in your portfolio's value one day and take that increase (and more) away from you the next. Just what effect do wide swings in investment returns have over the long run?
Compare $100,000 invested in two different portfolios. If the first portfolio increases 8% every year, slowly but steadily, you will have $685,000 after 25 years. In the other $100,000 portfolio, assume that you have a 25% increase one year, followed by a 15% decline the next year. After 25 years of alternating 25% increases and 15% declines, your $100,000 will be worth only $385,000.
Not only can high volatility in your investments give you sleepless nights - or at least cause for concern - it can also lower your long-term results. Be sure to factor this into your long-term strategy and your investment selections.