It Makes Mathematical Sense to Lower Volatility

by Jay Pestrichelli on October 1st, 2011

Reading through the Wall Street Journal on my way to Kansas City this morning, I stumbled upon a great article that helps show how lower volatility portfolios outperform over the long term.

Beat the Markets with Less Risk does a great job of showing why lower volatility outperforms over time and gives some great ETF references as well.

If you don't have a WSJ subscription, don't worry. The message is one that we've been talking about non-stop over the last year. How many times have you heard one of us use the comparison of the +/-10% portfolio fluctuation vs. one that has more volatility and moves +/-30%?
Or Perhaps you've seen us demonstrate the difference in in performance of three theoretical portfolios with different volatilities.


This chart shows the mathematical result of 3 different portfolios that had different volatility profiles but produced varying results. This is straight math and has nothing to do with the way the portfolios are managed.


You can see that each portfolio has a net +8% difference over any 2 year period. However over time, the portfolio with the smaller losses and smaller gains, outperform over the more volatile ones.


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