If you have been reading our content for a while, you’ve probably seen the word “volatility” pop up a few times, and it is no accident that we mention it often when we talk about our investing principles.  This is because volatility is a crucial concept to understand, as it greatly affects your return on investment.  If you want to build your wealth quickly and safely (with “safely” being the more important of the two!), you’ll want to avoid volatility as much as possible.  Many investors are shocked to find out how much a volatile investment robs from their bottom line because the effect can be hidden if you don’t pull back the curtains and look closely.  The chart below demonstrates the devastating effect volatility has on your investment.

If you invested $100,000 at a consistent 10% return, you could double your money in about seven years.  However, if that investment were to take a 25% loss in value the first year, you would need to achieve a 17.8% return for the next six years in a row to double your money — a feat that would be difficult to pull off.

Especially if you’re an older investor and don’t have time to play “catch up,” are you willing to risk everything in volatile investments like the stock market?  One of the reasons it requires such a large return to double your initial investment over the next six years is that your $100,000 investment has a remaining value of only $75,000.  Not only do you have to play “catch up,” but you have to do it with far less money.

Here’s one more example.  Let’s look at the performance of the S&P 500 over a period of 42 years.  You can see the volatility year after year.  Even with this volatility, the average return has been a respectable 10.09%.

S&P Index Fund Volatility Over 42 Years

The Power of Consistent Returns

If you were to have invested $100,000 into the S&P 500 index fund in 1975, it would be worth $3.8 million today.  That’s not bad, but what you don’t see is what is lurking below the surface of all that volatility.

Let’s look at the same time period of 42 years, but imagine you found an investment with a consistent return of 10%.  What would it look like without all that volatility?

You might be surprised to find that, even though the average annualized returns are almost identical, the same $100,000 investment with consistent returns and no volatility becomes $6 million.

By putting your money in an investment with a consistent 10% return and no volatility, you would have $2.2 million more in your account today.  A consistent return with no volatility is the clear winner.

Higher returns look good on paper, but as you can see, all the volatility kills them over time because they have to make up more ground every time they take a loss.  On the other hand, investments with consistent returns never lose ground and keep chugging right along.  Does it remind you of the tortoise and the hare?

All of Hughes Capital’s investment opportunities offer investors consistent net returns, month after month, with no worry of volatility.

It’s clear that volatility can be detrimental to your return, but how does risk tie into all of this?  People often refer to volatility and risk as being synonymous; they are not.  Volatility is more about the ups and downs of an investment, while risk is all about the timing.  This refers to the timing of the purchase, but even more so, the timing of the sale, because that is where your risk comes in.

Any time you are required to sell an investment, the risk increases because the timing of the sale might not be optimal.  If you become forced to sell in a down-cycle, it will usually result in a loss of profits, or worse yet, principal.  You may think that you’ll be able to control when you need to sell, but things like needing to care for an elderly parent, hefty medical bills, or other situations that require a sudden need for capital can come up unexpectedly.

One way to limit your risk is by choosing investments that don’t require a lot of timing on either end.  (This usually means an investment with low volatility.  When the value doesn’t fluctuate, you will always have a general understanding of what you would get if you sold in a month, in a year, or in 5 years.)  A 10-year treasury bond would be a good example of this type of investment, as it has minimal volatility, but it also has a low return on investment, which is not ideal.  Investments with low volatility and higher net returns are not easy to find, but we created our Buy and Hold Fund and Secured Portfolio investment option solve this dilemma for investors.