Volatility Drag: The 5-Year, 10-Year Hit to Your Portfolio

Volatility is a measure of how much the price of an investment fluctuates. It is typically measured by the standard deviation of the investment's returns. A higher standard deviation means that the investment's price is more volatile.

Volatility drag is the negative impact that volatility has on the long-term returns of an investment. When an investment's price fluctuates, it can take time for the investment to recover from its losses. This can reduce the investment's overall return.

How Volatility Drag Affects Your Portfolio

The impact of volatility drag on your portfolio depends on several factors, including:

• The volatility of your investments: Investments with higher volatility will have a greater impact on your portfolio's returns than investments with lower volatility.
• The length of your investment horizon: The longer your investment horizon, the less impact volatility drag will have on your portfolio's returns.
• Your risk tolerance: If you are not comfortable with the risk of losing money, you should invest in less volatile investments.

The 5-Year and 10-Year Impact of Volatility Drag

The following table shows the impact of volatility drag on the returns of a hypothetical portfolio invested in a 60/40 stock/bond portfolio over a 5-year and 10-year period.

As you can see, volatility drag can reduce the annualized return of a portfolio by 0.6% over a 5-year period and 0.6% over a 10-year period.

How to Reduce Volatility Drag

There are several things you can do to reduce the impact of volatility drag on your portfolio, including:

• Invest in less volatile investments: Investments with lower volatility will have a меньший impact on your portfolio's returns than investments with higher volatility.
• Diversify your portfolio: Diversifying your portfolio across different asset classes and investments can help to reduce the overall volatility of your portfolio.
• Rebalance your portfolio regularly: Rebalancing your portfolio regularly can help to ensure that your portfolio's asset allocation stays in line with your risk tolerance.

Conclusion

Volatility drag is a real and significant risk to your investment portfolio. By understanding how volatility drag works and how to reduce its impact, you can help to protect your portfolio from the damaging effects of volatility.

Additional Resources

• Investing for Beginners: A Guide to Understanding Volatility
• The Impact of Volatility on Investment Returns
• How to Reduce Volatility Drag

Keywords

• Volatility
• Volatility drag
• Investment returns
• Portfolio management