Long-term investing is crucial to the success of any individual’s portfolio regardless of whether it’s a 401(k), Roth IRA, or individual brokerage. Volatility is a real hindrance to this.
If you are someone who has kept even a distanced eye on the stock market this past year, you know that it’s been a great year with the S&P 500 doing almost 25% (mostly thanks to the Magnificent 7).
- Volatility hinders long-term returns, disrupting compounding with unpredictable “rollercoaster returns.”
- A lower standard deviation in a portfolio historically means fewer ups and downs, supporting consistent long-term growth.
- Underperforming the S&P 500 in certain years is acceptable if the portfolio yields better returns over the extended period, aligning with the goals of many retirement accounts.
Understanding Standard Deviation and Volatility:
Investors navigating the complex landscape of financial markets often encounter the terms “volatility” and “standard deviation.” Volatility, in the investment realm, can act as a formidable hurdle to achieving robust long-term returns. This volatility manifests as the notorious “rollercoaster returns,” disrupting the smooth compounding crucial for sustained and predictable growth. It’s akin to a financial storm that can lead to unpredictable outcomes, affecting the overall health of an investment portfolio.
At the heart of risk assessment in finance lies the concept of standard deviation. This statistical measure gauges the extent to which values within a dataset deviate from the mean. In the context of investments, standard deviation serves as a reliable indicator of portfolio volatility. A higher standard deviation implies greater variability in returns, signaling a riskier investment. Understanding this metric is pivotal for investors aiming to strike a balance between risk and reward in their portfolios.
Benefits of Low Standard Deviation Portfolios:
Enter the realm of low standard deviation portfolios—a strategic choice for investors seeking a more stable investment journey. Such portfolios historically demonstrate fewer ups and downs, providing a consistent performance trajectory. This stability isn’t just a matter of comfort; it fosters an environment conducive to compounding, the magic that occurs when investments generate earnings, and those earnings generate their own earnings.
In essence, the benefit of embracing low standard deviation is twofold. Firstly, the consistency in performance minimizes the jolts associated with volatile markets, offering a smoother ride for investors. Secondly, the stability creates an optimal setting for long-term growth through compounding, a key element in achieving financial goals.
Breaking the Mold:
Amidst the prevailing notion that investing often involves high turnover and embracing the inherent volatility of the standard stock market, investors have the power to challenge this norm. Recognizing that there are alternative approaches to constructing a portfolio is crucial. Embracing low standard deviation becomes more than just a choice; it can become a strategic advantage.
Investing in low standard deviation portfolios isn’t a deviation from the norm; rather, it’s a conscious decision to navigate the market with stability and foresight. This approach not only helps weather financial storms more effectively but also positions investors for potentially superior long-term returns. Particularly in the context of retirement accounts, where steady growth is often a primary goal, the merits of low standard deviation portfolios shine through, offering a path less traveled but potentially more rewarding.
If you would like to learn more about us or how you can find your current portfolio standard deviation, please email Jordan at firstname.lastname@example.org or visit our contact page by clicking here.
Chapwood Investments, LLC is a SEC Registered Investment Advisory Firm. No mention of a particular security, index, derivative or other instruments in this material constitutes an opinion on suitability of any security. The information and data in this material were obtained from sources deemed reliable. Their accuracy and completeness are not guaranteed. At any given time, principals at Chapwood Investments, LLC may or may not have a financial interest in any or all of the securities or instruments discussed in this material. The guests appearing in material do not receive compensation or provide endorsements or testimonials. Past performance is not indicative of any future results.
Calculators are hypothetical examples used for illustrative purposes and do not represent the performance of any specific investment or product. Rates of return will vary over time, particularly for long-term investments. Investments offering the potential for higher rates of return also involve a higher degree of risk of loss. Actual results will vary. We strongly recommend that you seek the advice of a financial services professional before making any type of investment.