Assumptions
Investment
yrs
%
%
Costs
%
%
Comparison
%
Preset Scenarios
Average vs Actual Growth
$100,000 over 20 years
Average (Arithmetic)
10.00%
Simple average
Actual (Geometric)
8.38%
Real compound return
Volatility Drag
1.62%
Return lost to volatility
Dollar Cost of Volatility
$0
Gap at end of period
The "Aha!" Moment — Same Average, Different Results
| Scenario | Year 1 | Year 2 | Average | Actual | $100K Becomes |
|---|---|---|---|---|---|
| The Trap | +50% | -50% | 0% | -25.0% | $75,000 |
| Moderate Swing | +30% | -10% | 10% | +8.2% | $117,000 |
| Mild Swing | +20% | +0% | 10% | +9.5% | $120,000 |
| No Volatility | +10% | +10% | 10% | +10.0% | $121,000 |
Why This Matters:
- Your mutual fund statement might show a "10% average annual return." But averages lie. If you gain 50% then lose 50%, your average is 0% — but you've actually LOST 25% of your money.
- Volatility is a hidden tax on your returns. The greater the swings, the wider the gap between what was "averaged" and what you actually earned.
- The formula: Geometric Return ≈ Arithmetic Return - (Std Dev² / 2). Higher volatility = bigger drag.
- The smoother the ride, the more you keep. Two investments with the same "average return" can produce wildly different results. The one with less volatility wins every time.
- This is why protected growth strategies (indexed annuities, buffered strategies) can outperform despite lower "averages" — they reduce volatility drag.