Quote:
Originally Posted by baudib1
If you're dollar-cost averaging and not planning on using the money any time soon then volatility is not really a big deal.
If someone in 2008 had just held on to whatever they had instead of panicking they'd have made a ****ton between then and now and found amazing buying opportunities.
There is another reason volatility is undesirable; let me illustrate.
Say you have two securities that average a 10% (simple) return per year for 5 years, and you compound every year. One is a flat 10%, no variance. The other gives you:
20%
-10%
15%
25%
0%
You invest $1,000 in each, at the end of 5 years the no variance one is worth $1,000 * 1.1^5 = 1610.51
the other is worth:
$1000 * 1.2 * 0.9 * 1.15 * 1.25 * 1 = 1552.5
Both have an average* return of 10% per year.
*The geometric mean of the second is only ~9.2%.
So if you have an investment that has an expected ROI of 10%, the smaller the variance the higher is compounded rate of return will be over time.