Broad diversification and lower volatility can result in a higher compound return and greater eventual wealth.

In this example, while Portfolio 1 posts a strong gain in the first year, this is more than eliminated in the second year. By contrast, Portfolio 2 experiences a much smaller gain and subsequent loss during the 2-year period. But its lower volatility produces a higher compound return and preserves more portfolio value.

Managing volatility is particularly crucial during a market downturn. After experiencing a loss, a portfolio must earn an even higher return in future periods to fully recover its previous level.

Diversification is the key investment tool used to manage and reduce volatility.

The Impact of Volatility

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Impact on a hypothetical $100,000 Portfolio

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