In the last few blog posts, I've discussed that volatility is your friend in portfolio management. The greater the volatility of a particular stock index or bond, the higher is the eventual portfolio value. However, I have not addressed a pertinent point, which is that drawdowns do happen during the course of the portfolio. The figure below shows the performance of a portfolio comprising 70% stocks and 30% bonds over the last 26 years.

Although the final value of the portfolio is 3.3 times the initial value and is close to the highest value achieved, it has gone through several drawdowns, the most significant of which occurred during the Global Financial Crisis, when the portfolio value dropped by 44% from the peak. Are drawdowns of importance to investors? It depends on the risk profile of the investor.

For investors who are risk-averse and are fearful (Read more...)