Understanding market volatility is one of the key components when personalizing a portfolio to meet a client's investment needs. Often times when discussing strategy, performance is discussed over volatility and risk. By implementing good risk management and volatility controls, one can increase the likelihood of suitable performance for their investment portfolio.

Market volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.

Generally speaking, investors are loss rather than risk averse. Unfortunately, many investors aren't aware of the volatility associated with their investments and they focus almost entirely on the upside potential of an investment which ultimately affects their overall performance as illustrated in the annual DALBAR study*.

According to the DALBAR Study, investor's behavior has resulted in dramatically lower returns versus market indices.

Over a 5 year period the average equity fund investor underperformed the S&P 500 by an average of 5.65% a year. Additionally the average fixed income investor returned 0.10%/year versus the Barclay's 3.25%/year return. This means the average equity investor only achieved 55.05% of the index return and the average fixed income investor only achieved 3.08% of the fixed income index return.

The following questions were designed to help clients gain a better understanding of market volatility and the risk-reward associated with market volatility in hopes that the relationship can be more easily understood.

Historically the market experiences 5, 10, and 20% corrections or drawdown on a regular basis. For each of the following, enter in how often (in months) you'd estimate that these drawdown occur?

5% Drawdown:

10% Drawdown:

20% Drawdown:

PrintQ: Historically the market experiences 5, 10, and 20% corrections or drawdown on a regular basis. For each of the following, enter in how often (in months) you'd estimate that these drawdown occur?

5% drawdowns: your answer was every: 5 months - the correct answer is every 3.3 months.
10% drawdowns: your answer was every: 10 months - the correct answer is every 18 months.
20% drawdowns: your answer was every: 15 months - the correct answer is every 42 months.

Amount Invested	Correction Amount	Dollars Lost During Correction
$100,000	5%	$5,000
$100,000	10%	$10,000
$100,000	20%	$20,000

At , we believe that no investment is without some type of risk, but the goal of an investment strategy should be to design a solution customized to the amount of risk you feel comfortable with. At our portfolios are constructed using diversified strategies and asset classes. By using this approach we aim to provide investors with a smoother, less volatilite portfolio, designed for their peace of mind.