Impact of Volatility
Why Market Swings Matter More Than Most Investors Realize
Market volatility is normal. Prices move up and down, sometimes sharply, and that's simply part of investing. However, excess volatility can quietly work against your financial plan in ways that aren't always obvious.
Volatility and Compounding
One of the most overlooked effects of volatility is how it impacts long-term growth.
Losses require disproportionately larger gains to recover:
A 20% loss requires a 25% gain to break even
A 30% loss requires a 43% gain
A 40% loss requires a 67% gain
$1,000,000 × .60 = $600,000
This demonstrates a 40% loss in the market.
$600,000 × 1.40 = $840,000
This demonstrates a subsequent 40% gain in the market. If you lose 40% and immediately gain 40%, you will still lose $160,000.
Because of this, two portfolios with the same average return can end up with very different results if one experiences deeper or more frequent declines. In other words, the path your portfolio takes matters—not just the final average return!
Volatility and Investor Behavior
Excess volatility doesn't just affect performance on paper; it affects how people feel and act.
Large swings can:
create stress and uncertainty,
force decisions during emotionally charged periods,
and increase the likelihood of selling after declines and waiting too long to reinvest.
These reactions are human and understandable. Our role is not to expect perfect behavior, but to reduce the pressure that leads to poor timing decisions.
Volatility During Retirement and Withdrawals
Volatility becomes especially important once withdrawals begin. When income is being taken from a portfolio:
losses can permanently reduce the dollars available to recover,
withdrawals during down markets may lock in declines,
and early volatility can meaningfully change long-term outcomes.
Put simply, losses matter more when money is coming out than when money is still being added.
Our Approach
We try to eliminate market volatility for an agreed upon part of your portfolio. By prioritizing disciplined overall portfolio construction, risk management products as well as market based, and thoughtful planning, we aim to support steadier compounding, clearer decision-making, and more reliable long-term results.
What This Means for You
Managing volatility isn't about chasing returns or predicting markets. It's about creating a smoother investment experience that supports your financial plan—through both good markets and difficult ones.
This is for educational purposes only.
