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Effects of Volatility on Total Return

A Steady Quality Growth Portfolio vs. a Hot Sectors (volatile) Portfolio

A red hot stock or sector is very tempting. When you hear your buddies are making 34% returns, it’s only natural to get excited. But if you look at a portfolio of volatile stocks over the long term, you’ll see a dramatic difference.

Here is a chart of two hypothetical portfolios with the same average annual return for 10 years—10%. Note that whereas the Volatile Portfolio posts huge gains 5 years out of 10 & goes as high as 34% while the Steady one never posts half that return, in the long run, the Steady Earner delivers more!

  Steady Earner Portfolio Red Hot but Volatile
Year $1,000,000 Annual
Return
$1,000,000 Annual
Return
1 $1,100,000 10% $1,340,000 34% Hi
2 $1,155,000 5% $1,219,400 -9%
3 $1,316,700 14% $1,536,440 26%
4 $1,435,200 9% $1,290,610 -16%
5 $1,621,780 13% $1,690,700 31%
6 $1,654,210 2% $1,673,800 -1%
7 $1,852,720 12% $1,975,080 18%
8 $2,149,160 16% Hi $1,738,070 -12%
9 $2,278,110 6% $2,103,060 21%
10 $2,574,260 13% $2,271,310 8%
Average Return: 10.0%   10.0%
Compounded Return: 9.9%   8.5%


Bottom Line: Long-term the unglamorous, un-sexy Steady Earner returns over $300,000 more!

Needless to say, Pacific Investment Advisory recommends the safety as well as the long-term growth of the steady earner stocks. You may not impress your buddies at the office, but you’ll be financially more secure in the long run.

The criteria utilized do not guarantee gains or profits, nor is past performance a guarantee of future gains or profits.

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