Wed Oct 09 2024, by Tyler Gardner

How to Beat Higher Returns with a Stable Portfolio

Here is exactly how I can make a portfolio averaging 5% per year beat a portfolio averaging 5.5% per year over a 10-year time horizon.

I'm Tyler. I'm a former financial advisor and portfolio manager. Now I make financial content for free so that you don't have to pay for it.

Portfolio A vs. Portfolio B

Number one: Portfolio A returns 5% per year for the next 10 consecutive years. With an initial investment of $100, it ends up being valued at $162.90.

Number two: Portfolio B returns 5.5% but has more volatility, meaning its returns fluctuate on an annual basis. Here’s how it breaks down:

• Year one: 20% drop
• Year two: 20% gain
• Year three: 10% drop
• Year four: 10% gain
• Years five through eight: 10% gain
• Year nine: 5% gain
• Year ten: 10% gain

With the same initial investment of $100, Portfolio B ends up being valued at $160.70, less than Portfolio A. Why? Because Portfolio A was able to take advantage of compound interest, whereas Portfolio B, even with a higher average return, had higher volatility and a lower 10-year return.

Questioning Financial Advice

So next time some financial guru tells you that just because the market has averaged 10% per year, you should therefore expect to compound your money at 10% per year, it might be a good time to question their guru status.

If any of this is helpful, like and follow and I'll keep trying to get you one step closer to where you need to be.

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