Dollars and Diagrams

The Curious Case Of Standard Deviation…


Within the Properties of Normal Distribution:

⚪68% of the time, returns will be disbursed between 1 standard deviation

⚪95% of the time, returns will be disbursed between 2 standard deviations

⚪99.7% of the time, returns will be disbursed between 3 standard deviations

According to RightCapital, the S&P 500 Index has averaged a 10.1% rate of return between 1970 and 2020.  During this period of time, the standard deviation is 16.1.

Averaging a 10.1% rate of return over this 50 fifty year period is fantastic.  However, most people couldn’t have endured the volatility of the dispersion of returns.

To average 10%, there will be periods of time when you might lose 40%.

How do you give yourself the best chance of earning 10%?

???? Have an emergency fund

???? Keep five years worth of portfolio income in fixed income investments

???? Invest the balance for growth.   Keep the less volatile investments in the first two buckets.  Invest for growth in the 3rd bucket.  Never put yourself in a situation where you have to sell your growth investments during a down turn.


Return of 10.1%

Standard Deviation 16.1

One Standard Deviation returns would be between:

10.1%-16.1 = -6%  &

10.1%+16.1 = 26.2%

Two Standard Deviation returns would be between:

10.1%-(2)(16.1) = -22.1% &

10.1+(2)(16.1) = 42.3%

Information in this material is for general information only and not intended as investment, tax or legal advice. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.


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