By Eric Crittenden – Longboard Funds
The way you get to your financial goals is as important as performance
Robert Frost ends his poem “The Road Not Taken” with the iconic lines:
“Two roads diverged in a wood, and I-
I took the one less traveled by,
And that has made all the difference”
For investors, the path their portfolios travel can make all the difference as well.
There are three portfolio statistics that will help you measure whether your portfolio will provide you with a smooth journey:
Everyone understands performance—that’s the return a portfolio needs in order to meet an investor’s financial goal (for most, a comfortable retirement). Yet, many investors don’t fully account for the path traveled, and the related effects it can have on their portfolios. The biggest obstacles here are typically volatility and maximum drawdown. By employing strategies to mitigate the effects of these obstacles on their portfolios, investors can feel more confident and in control of their financial futures.
The impact of overall portfolio volatility
Bouts of volatility can upend even the most in-depth financial plan. If their investment path is too volatile, an investor can feel off course and will often abandon their plan to start a new one. Put simply, volatility describes how large the price swings are in any given security. According to Investopedia, volatility is “commonly measured by standard deviation, with lower readings implying lower volatility or price swings.”
Most investors seek an experience like a well-planned road trip, where the carefully chosen, efficient route you selected will get you to your destination. If you get off-course from it, your GPS, Google or even a good old fashioned paper map is there to set you straight.
Unfortunately, the experience that most investors actually have feels more like a spontaneous night drive: you can only see a bit in front of you thanks to your headlights and you don’t have the time or attention to mess with maps in the dark. You have to trust you have picked the right road to get you to your destination—even though it doesn’t always feel right.
Leave A Comment