Is Adding Equity Always Equal to Adding Volatility?

Is Adding Equity Always Equal to Adding Volatility?

Analyze the role of equities in long-term portfolio performance, questioning the common narrative that equities are the primary source of volatility.

In the dynamic world of investing, the dilemma between sticking to traditional investments and venturing into equity investments is a common quandary for many new investors.

However, traditional avenues like fixed deposits often lag behind inflation, leading to a diminished real rate of return.

Let’s do the math: The real rate of return you eventually get is -2%

It’s understandable to shy away from the perceived turbulence of equity investments, fearing the volatility it may bring.

However, what if I told you that “Adding Equity to your portfolio doesn’t always come hand-in-hand with Added Volatility”

Debunking the Myth: Equity Vs. Volatility

Why do investors harbor apprehension towards equities? The answer lies in their perceived volatility.

Market swings and news headlines often paint a picture of equities as tumultuous and risky. However, this perception overlooks an essential aspect of investing: the significance of a long-term perspective.

The Power of Asset Allocation:

Asset allocation is the strategic distribution of investments across various asset classes, such as equities and bonds, in order to optimize returns while managing risk.

Traditionally, conservative investors have favored fixed-income securities and cash due to their stability.

However, the data reveals a fascinating insight: integrating equities into this mix can potentially yield better returns without proportionally increasing risk.

Data-Driven Insights: The Chemistry of Investing Report

A report by White Oak Capital Mutual Fund sheds light on the impact of equity in a bond portfolio. Interestingly, by integrating a portion of equity, the volatility can decrease, and the average return can improve.

The Non-Linear Relationship of Equity and Volatility:

Source: WhiteOak Capital Mutual Fund

Key Observations:

  • It can be inferred from the above table that a 100% bond portfolio has delivered an average return of 7.6% with a volatility of 7%. However, by adding 10% equity, volatility reduces to 6.1%, and the average return improves by 1%.
  • It is also notable that 75% Bond and 25% Equity combination has same volatility as a 100% Bond portfolio with a 2.5% higher return measured for 1-year of the average volatility (standard deviation) and average return observations.

Remember, “Adding Equity Is Not Always Equal to Adding Volatility” – it can be your catalyst to venture into a world where growth and stability coexist

Expert Guidance for Tailored Portfolios

Navigating the complexities of equity investments and portfolio management can be daunting. Let the CFA team at iVentures help you navigate the complexities of the market, ensuring your portfolio is tailored to your risk appetite and investment goals.

Seize the opportunity today and let your wealth flourish!