Financial Planning Fridays #125: Consistency Counts

Hi Friends, Today we want to take a closer look at something that is often overlooked when evaluating investment returns, the importance of consistency over time. Achieving a great return is, of course, important. But achieving a consistently strong return can make an even bigger difference in your long-term financial success. Please let us explain why. An investment portfolio that delivers steady returns can outperform one with the same average return but with more volatility. Let’s take a look at this chart together. Here, we compare three $1 million investment portfolios, each with an average annual return of 7%. Portfolio A achieves 7% every single year. Portfolios B and C follow more volatile paths to reach that same 7% average. Despite having the same average annual return, Portfolio A outperforms the more volatile portfolios, and in the case of Portfolio C, by more than $100,000 over 3 years! Now, we think this next chart is even more compelling. A portfolio with a lower average return can actually outperform a portfolio with a much higher average return if that higher return comes with more volatility. Please take another look at Portfolio C in this chart. Even though it has an average return that is twice as high as Portfolio A, it still underperforms by over $100,000 after just three years. This shows us just how important consistency is in achieving the long-term performance needed to reach your financial goals. So, how do we promote consistency at Presilium in your portfolio? By diversifying across different types of investments. By regularly rebalancing. And by resisting the urge to chase the latest market trends or “hot” areas of the market. Thank you and we look forward to talking with you next Friday. 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.