Reducing Volatility

There is an easy solution to reduce the volatility of your investment portfolio.

No, we are not suggesting you increase your cash allocation. We all now that will simply eliminate any future purchasing power – in many ways that is the riskiest strategy (that conversation for another time).

And, diversification will only go so far as we saw in 2008-09 and as recently as December. Given the global nature of things, most stock markets will decline in during bear market. Of course, the magnitude of the decline will vary.

The actual answer is: look at your portfolio less often.

A recent study looked at monthly historical returns data for four combinations of global stocks and bonds going all the way back to January of 1926, up until December 2017: 30/70, 50/50, 70/30 and 100/0. Each year, portfolios were re-balanced to their original allocations. The result shows what kind of volatility you would have experienced if you had looked once a month, once a year, once every five years or once every ten years.

Across all four portfolios, if you looked at all of them once a month, you would see a negative return about once every three months. If you looked once every 12 months, you would only see a negative return about every 6 years. And if you only looked once every 5 years, about 90% of the time you’d see a positive return. That is, nine out of ten times, your portfolio’s value would have been higher than the last time you checked.

And if you only looked once every ten years, nearly every time, for all the portfolios, you would see a positive return. (Just once, the 100/0 portfolio showed a small negative performance number.)

Can you do this? Well, you don’t check on the value of your house every day, week, month or even year, do you? The value of your house may well be fluctuating wildly every week, but you’re unaware of this, because you’re not getting a weekly appraisal. Chances are, your experience with this valuable and important investment is that when it comes time to sell, after multiple years of ownership, the value is greater than what you paid for it. It seems like no volatility at all.

In a world of hyper-inflated news it may be difficult not paying attention to the value of your portfolio. But the historical message is clear – the longer your holding period the more likely you will make money.