Tamales wrote:"The Myth of Volatility Drag"
This is actually a halfway decent article. I will quote the relevant piece
“Volatility drag” is one such conclusion. We found that the arithmetic and geometric means are related — both are equations using the same set of numbers — but the difference between them is in the definition, not from a force. Why, then, is this such a persistent myth? There are two seductive arguments made in its favor. One is very simple and appeals to our intuition, but contains a flawed assumption. The other stems from a slight misinterpretation of terms in a widely used mathematical model of prices."
I don't really have much more to say than that. There isn't a volatility drag. If the Boglehead Wiki has an article on that perhaps it should be worded more carefully. Anyone who went through middle school math (or maybe junior high) can do this type of math. If some one uses the wrong equation (addition instead of multiplication) then they deserve what they get. There has to be some some basic level of mathematical competency we expect investors to have!
Random Walker wrote:I found this link that explains what I'm talking about:
http://swanglobalinvestments.com/2016/0 ... is-a-drag/
This article is non sense. There is only one correct way of calculating returns over a period of time: (final value - initial value)/initial value. If two assets or portfolios deliver the same return (as in this formula), then they have the same return (as long as you are in accumulation and not withdrawing a large amount at the wrong time).
The illusion that there is a drag is just coming from using wrong math and wrong equations. Math is math.
There are some sensible reasons to hate volatility. If you are in withdrawal mode and need to withdraw a lot (say 30%) of your portfolio at a given instant, having a volatile portfolio could hurt you. That is obvious.
The parts I really do want to correct are 1) volatility by itself is not a drag 2) there isn't a re balancing bonus unless one can show hard back testing data. If we are fine on those two mathematical concepts, then we are good. I don't have anything further to say.