MArket volatility
In this example, $100,000, grows by 12% for five straight years to a balance of $176,233. If there was just one negative year (-12%), how does that affect the balance?
What interest rate would you have to earn to get back on track from the negative year ($123,632) to $176,000? When we ask this question , the response is often 24%. You actually need 42%.
Understanding Market volatility
Understanding market volatility can make or break your portfolio’s performance. This example reinforces a Warren Buffett adage, avoid loses at all costs. The return necessary to recover from a dip in the market is often underestimated. In this example the common answer is 24% but the return necessary to recover adequately is 42%. If you take this further, you will uncover a larger problem. If after the negative -12% return you receive 24%, and the year after that 12%, not only will you have lost capital, but you will have lost another very important asset- time. There are ways to win the volatility game. However, they are often overlooked by traditional wealth management.