The Best Portfolios are Consistent and Boring

Another lesson I’ve learned the hard way has to do with volatility and its inherent risk.  When I stretched out for increased returns I always got more volatility and not always the extra returns.  Through this process I learned that although better returns are certainly possible the fact is it’s the consistency of a decent return that builds wealth over time.  Big returns followed by losses typically will not out perform small consistent gains.  Check out this eye opening set of data:

Return 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%
Start 100000 107000 114490 122504.3 131079.6 140255.2 150073 160578.1
Return 15% -5% 15% -5% 15% -5% 15%
Start 100000 115000 109250 125637.5 119355.6 137259 130396 149955.4

First off, I love applying statistics to my investing strategies that are generated by math a 6th grader can understand  It makes what I am doing more understandable and quite frankly, fun.  I enjoy listening to “market pundits” pounding the table all day advocating this investment or that investment with no accountability to its results.  Two months later, the guys that were “right” come back on the show and pat themselves on the back…the rest off them come back on the show but never bring up the fact that they have been terribly wrong the last 5 times they made on air recommendations.  Anyway, back to that chart above…quite simply, 7% year after year is far better than a few good years with a few slightly bad years mixed in.  Don’t even think about having a really bad year….one 50% down year requires a 100% gain to break even…even a 25% loss requires a corresponding 33.3% gain to break even.  Last I checked, we don’t invest to break even!

On a side note, did you ever have a friend go to Vegas and gamble and when he came back said, “I broke even.”  That statement means he lost! No one in the history of Las Vegas went there and broke even…its statistically impossible!

In short, 7 years with 7% gains in a row is much better than 4 out of 7 years with 15% gains and the other 3 down 5%.  As you can see above, the slow steady approach left us with 160k after 7 years and the volatile approach with higher returns (sometimes) left us with only 150k.

I like a little action as much as anyone but I have learned action and excitement with investments is a bad idea.  So if you need some action, do what I do, bet on golf and invest in the market.


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