Intech explores whether market volatility should be avoided or harnessed, arguing that while large drawdowns can damage compounding, disciplined rebalancing can turn volatility into a potential return driver. The paper challenges the idea that volatility is purely harmful, showing how outcomes depend heavily on sequence and magnitude of returns.
Is Volatility a Friend or Foe?
Intech
Adrian Banner, David Schofield
Research
10 Pages
Key Takeaways
Drawdown Recovery Impact: A 50% loss requires a 100% gain to recover, illustrating how volatility-driven declines can severely hinder long-term compounding.
Sequence Of Returns: A -38% loss followed by +60% still results in -1%, while -11% then +20% yields +7%, showing path dependency matters.
Volatility Harvesting Potential: Rebalancing across assets can capture price dispersion, with strategies benefiting during periods of elevated volatility above historical norms.
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