Financial Planning Fridays #95: More Votality, Please!

Many investors fear volatility in stocks and see it as something to be minimized or avoided. However, we wanted to show you why over the long-term, it is actually something we should embrace and be thankful for.

A significant reason that stocks have returned so much more over time when compared with other asset classes such as gold, bonds, and cash is the volatility. The compensation for the randomness and unpredictable nature of short-term stock returns has been a higher long-term return.

Many investors are so focused on minimizing volatility that a number of “low volatility” indexes and ETFs have been created as an alternative to the traditional indexes. These indexes include only a portion of the stocks within the traditional indexes- those with the lowest expected volatility.

Please let me show you a few examples.

This chart shows the S&P 500 total return index vs. the S&P 500 low volatility total return index. Its monthly standard deviation has been about 15% below the traditional index.

Since its creation, almost 10 years ago, its return is also about 87% below the traditional index. A very steep price to pay for slightly lower volatility.

This next chart shows the Nasdaq 100 Index vs. the Nasdaq low volatility index.

This time the return difference is even larger- the low volatility index underperformed by more than 175% since its creation in 2017! An average of more than 25% per year.

Lower volatility sounds great in theory except that it also likely comes with much lower long-term returns.

At Presilium, we are comfortable emotionally dealing with the ups and downs of the market if it means reaching all of our client’s goals. Let us deal with market volatility for you so that you can focus on what is most important to you.

Thank you and we look forward to talking with you again soon.

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.