• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL
Help

Chapter 1. The No-Frills Investment Strategy > The End Result: Less Is More

The End Result: Less Is More

Chart 1.4 pretty much tells the story. With the exception of mutual funds in Group 1 (which includes many hybrid stock, bond funds), equity and balanced mutual funds of relatively low volatility produced essentially the same returns over the 1983–2003 decade as mutual funds of higher volatility. Generally, the highest average returns were secured with mutual funds of approximately average volatility, where the curve of returns appears to peak. However, differentials in return between Groups 2–3 and Groups 4–6 might or might not justify the increases in risk that are involved in stepping up from the very low-volatility groups to those at the average level.

Chart 1.4. Twenty Years of Results, Based on Volatility Group

All things considered, investors gain little, if anything, by placing investments in higher-risk holdings. Lower-volatility groups have provided essentially the same investment results over the long run as higher-volatility groups, but with much less risk.


To sum up, for buy-and-hold strategies, higher volatility has historically produced little, if any, improvement in return for investors, despite the greater risks involved. These actual results run counter to the general perception that investors can secure higher rates of return by accepting higher levels of risk, an assumption that might be correct for accurate and nimble market traders during certain periods but, in fact, is not the case for the majority of investors, who are most likely to position in aggressive market vehicles at the wrong rather than the right times.

Lower-volatility mutual funds typically produce higher rates of return and less drawdown, something to think about.

In as much as accurate timing can reduce the risks of trading in higher-velocity equities, active investors can employ more volatile investment vehicles if they manage portfolios in a disciplined manner with efficient timing tools. Relative returns compared to lower-volatility vehicles improve. Aggressive investors with strong market-timing skills and discipline might find it worthwhile to include a certain proportion of high-velocity investment vehicles in their portfolios—a certain proportion, perhaps up to 25%, but not a majority proportion for most.

Again, we will continue to consider tools that will improve your market timing. However, before we move into that area, I will show you one of the very best strategies I know to maintain investment portfolios that are likely to outperform the average stock, mutual fund, or market index.

  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint