Financial Planning Fridays #56: Consistency Counts

As an investor, our goal should be to get the highest possible return no matter what, right?

Wrong.

As important as it is to achieve a great return, it can be just as important to achieve a consistently great return. An investment portfolio with a consistent return can actually outperform another investment portfolio that has a higher average annual return but with more volatility. Please let me show you what I mean.

In this chart we show 3 different million-dollar investment portfolios, all with an average annual rate of return of 7%.

Portfolio A had a return of 7% every single year, while portfolios B and C took a more volatile route to reach their 7% average returns. Because of this, Portfolio A outperformed the more volatile portfolios despite having the exact same 3-year average return. In fact, Portfolio A outperformed the more volatile Portfolio C by more than $100,000!

What we feel is especially interesting is a portfolio with a more consistent, but lower, return can even outperform a portfolio that has a higher average rate of return, but experiences wider swings of volatility. Even one that has an average return that is twice as high.

In this chart, Portfolio C has an average rate of return that is double Portfolio A, yet it underperforms by more than $100,000 over 3 years.

Consequently, this is something that we need to focus on in order to achieve the long-term performance that we all need to reach our financial goals. We can do this by properly diversifying your portfolio, consistently rebalancing, and not being distracted by the latest and greatest investment trend promising outsized returns.

The more we can do to minimize large, negative returns over the years, the better off your portfolio will be in the long-term.

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.