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Investment Volatility is Personal

July 25, 2022 By Jean Keener, CFP, CRPC

Investment professionals like to talk about volatility in the investment markets. They talk about it like it’s a uniform feature that affects all investors equally. But it’s not. Volatility is personal. You have more control over your personal investment volatility than you might expect.

There are two main ways for you to exercise control over your investment volatility:

  1. Your asset allocation – what percentage you have in stocks, bonds, and cash
  2. How often you look at your investments

Asset allocation

Investment Volatility is Personal

There is a lot of investor education dedicated to the first area of control – asset allocation – so we won’t go into it deeply here. At a high level, the greater percentage of your investments you place in stocks, the greater your personal volatility will be. The greater percentage you place in cash and bonds, the lower your volatility will be. But unfortunately, the greater volatility you are willing to accept from your asset allocation, the higher your returns are likely to be. So, for the asset allocation portion of your volatility, there’s a direct relationship between volatility (risk) and return.

Look less frequently

For the second area of volatility control, you really can have your cake and eat it too. You can have lower personal volatility without sacrificing returns. How? By not looking at your investment accounts as often.

Let me give you an example. We’ll use Vanguard Lifestrategy Moderate Growth fund (VSMGX) as a proxy for a 60% stock / 40% bond portfolio. If you invested $100,000 5 years ago on June 30, 2017, you’d have $127,354* as of the end of June this year.

If you had walked away from your computer after making your initial investment in 2017 and finally decided to open your June 30, 2022 statement, you’d be pretty happy. You’d have made a 4.95% average annual rate of return.

However, let’s say you developed a habit of checking your Vanguard account frequently. At the end of the first 12 months, you were happy. You were up to $107,700 – more than a 7% return. By the end of December 2019, 2.5 years after your initial investment, you’re up to $121,000 – everything seems like it’s going well. But then at the end of March 2020, you’re horrified to discover that you’re almost back to where you started – just under $106,000. The horror turns to glee when, by the end of December 2021, your account has recovered and moved ahead and is over $152,000. You’ve now averaged a 9.74% return for the last 4.5 years. So, when you open your June statement and discover that you’ve lost $25,000 and are only at $127,354, it’s now super upsetting.

The results are the same. But the investor who looks at her statements more frequently goes on an emotional rollercoaster. The investor who chooses to look infrequently has much lower personal investment volatility.

Lowering your personal investment volatility in the real world

I’m not telling you to never check your statements. It’s important to look at them to monitor for fraud in the form of unauthorized disbursements or activity. But don’t hold the market values on any given day too tightly. Investment markets fluctuate a lot. Over the long term, they generally go up. But shorter term results are much more volatile. And the less emotional energy you can invest in checking your balances, the lower your personal investment volatility will be.

For our clients, updating your financial plan can seem to promote focusing on your investment values. If you’d rather lower your personal volatility and not spend much time looking at the investment values on your net worth statement or the investment performance, just let us know. We’ll be happy to have a low personal volatility meeting and just focus on what you can control with your financial plan. There will still be rebalancing tasks to perform or delegate, but we’re happy to participate in setting aside as much personal volatility as possible.

 

*Source for investment returns: Morningstar as of June 30, 2022.

Filed Under: Featured Posts, Investing, Living Well, News, Your Finances Tagged With: Investing

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