stability vs volatility

The Stability Tax: A Smoother Ride to Foregone Gains

photo shows a road with the sign BUMPS AHEAD

One school of thought about investing holds that ups and downs are the same as risk itself. A related belief: the role of a professional advisor is to minimize this volatility, to select investments and products and strategies that are more “stable” in the short term than traditional long-term investments, such as stocks. 

We have a different view, one that says the ups and downs are an integral, inseparable part of seeking long-term investment returns. In striving to grow long-term money over the long term, we work diligently to communicate the attitudes and strategies of effective investing. (It’s why you’ll hear us repeat ad nauseum, “It goes up and down.”) 

But don’t mistake us for pessimists. One of the attitudes of effective investing, we believe, is to embrace the idea that we get paid to endure volatility. Volatility is just the inevitable short-term wiggling, in our view. It’s not the same as risk if it’s just part of the ride. 

There are plenty of quizzes out there to “measure” one’s aversion to risk. Many produce a “risk number.” But one of the realities of investing is that risk and reward are related. So the higher a person’s “risk number,” the greater their potential returns. The lower the number, the less wiggling—and the stymied potential returns. There is a trade-off. 

We disagree with the notion that wiggling is a good measure of risk for long-term money, and it’s worth pointing out the consequences of this approach. Let’s do the math. 

Over an extended period, the foregone returns of a less-wiggly portfolio are, in effect, a stability tax. A lump sum invested for 25 or 30 years might only grow to half as much as a more effective portfolio that embraces that longer time horizon. 

For instance, imagine a person starting to invest for retirement at age 40: a monthly investment of $1,000 to reach their desired goals in an effective long-term portfolio would take $1,500 monthly in a less wiggly portfolio! All things being equal, less volatility would be nicer, maybe—but if this were you, would you take $500 every month from the rest of your budget to pay a stability tax?  

Put this way, the cost of avoiding some uncomfortable volatility is actually quite a burden! Half your future wealth? It’s a lot to pay to smooth some bumps now. 

Clients, that is why we work with you to determine if you can live with volatility on some fraction of your money. Instead of pandering to the fear of wiggling, it is more gratifying for us to strive to be effective long-term investors. We’re all about trying to grow the bucket, not giving you a smoother ride to a likely-poorer future. 

To be clear, this isn’t for everyone, and it is not suitable for short-term goals. But when you would like to talk more about avoiding the drag of stability on your long-term investing, please email us or call. 

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The Stability Tax: A Smoother Ride to Foregone Gains Presents: The Best of Leibman Financial Services

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Solid Ground and Serious Conflict

You’ve heard us talk before about not getting caught up in panic. It goes to one of our core principles, the idea of avoiding stampedes.

It gets a little complicated when we’re talking about world events that are so immediate. Conflict can be deadly and do serious damage, and the effects reach us all—whether we realize it or not.

We’re in a moment where the business headlines and market volatility are more stark than usual. It can feel disturbing, like things are less certain than ever.

But those of us just beyond the emergencies have an opportunity to reflect. What an important time it is to make sure that our goals, our values, and our resources are aligned. Are we focusing our efforts within our sphere of control? Are we investing in those causes we believe will be of service in this world?

Perhaps it’s how we keep panic from our hearts: find stability in being the most you that you can be. The dust will never settle if we insist on all the pacing, jumping up and down, or spinning in circles.

Invest wisely, spend well. It goes for our money and our attention. The leap to panic is a shorter—but way more costly—trip.

When you need to talk through anything troubling, please reach out.

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Letters To Our Children #8: Keep Your Eye on the Horizon


We wrote before about your three investment buckets, each with a different time horizon. Here is why that is so crucial.

Business founder Jeff Bezos highlighted the key thing about time horizons.
“If everything you do needs to work on a three-year time horizon, then you are competing with a lot of people. But if you’re willing to invest on a seven-year time horizon, you are now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue.”

The investment parallel is clear: just by lengthening the time horizon, you can live with the short term volatility that is inherent in the pursuit of long term investment results.

Those with a short time horizon—an insistence that market values be stable day to day or month to month—can generally expect meager returns. Stable values and liquidity both cost a premium, and if you want both you’re not left with much room for returns. This is good for your short-term bucket, but may hamper you anywhere else.

Behavioral economists have a theory that the preference for stability is very strong, part of human nature. If the demand for stability is high, then the price of stability may be high—and the rewards for enduring volatility may prove to be large since fewer are willing to do it. This is based on our opinion, no guarantees!

Bottom line: we believe in investing for the long term with your long term money, and leaving short term strategies to your short term bucket. It pays to understand volatility, and its role in your investment returns. No matter what, you should be able to live with your chosen strategy, even when (especially when?) it is uncomfortable.

Clients, if you have questions about this or anything else, please email us or call.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.