Volatility Simply Cannot Be Ignored

Why do we continuously preach the virtues of lowering portfolio volatility? Well, aside from the fact that our funds are made to do just that, consider this from the Mutual Fund Observer:

“There are funds that still haven’t recovered their October 2007 levels. We screened the MFO Premium database, looking for funds that have spent the past 101 months still mauled by the bear. We’ve found 263 funds, collectively holding $507 billion in assets, that haven’t recovered from the financial crisis. Put another way, $10,000 invested in one of these funds 3,150 days ago in October 2007 still isn’t worth $10,000.”

The opportunity cost associated with recovering from a major drawdown is huge, robbing investors of the most precious commodity they have—time. Individual investors have fairly limited time over which to save and invest, let’s call it 40 years from when they start saving in their mid-20s to when they retire in their mid-60s. And the sequence of returns earned by investors matters greatly in determining when, or if, retirement can actually be reached. Volatility simply cannot be ignored.