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Why we should talk more about volatility. : UKInvesting


I am at an age when I might start taking some income from my investments.

The common suggestion for people in my situation is to rebalance your portfolio towards bonds or funds that pay a dividend. The idea being that dividends are less volatile than share prices and so offer more security if you need to generate an income from your investments.

When I started to look at funds offering a high dividend yield, it was clear that this was always at the cost of capital growth. I struggled to find any funds offering both a high dividend and strong growth.

This is completely understandable. Companies that can think of nothing better to do with their profits than pay it back to shareholders are, by their very nature, not likely to also experience high growth.

I decided to calculate the annualised volatility of all the investments in my portfolio, some of which I have held for 10 years or more. I quickly discovered holdings that had consistently achieved much higher growth than the best dividend-paying funds and with very low price volatility. Pretty much any ETF which tracks the FTSE All World Index is likely to fall into this category.

If I can rely on these funds not to fluctuate wildly and yet still achieve strong annual growth, why would I sacrifice that growth for a poorer-performing income fund?

Unless I am convinced otherwise, any rebalancing I do will be towards investments that have consistently achieved the strongest growth and with the lowest volatility.

What am I missing?



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