Volatility Effects I: Lowered Expectations

A problem with the way expected return rates are usually expressed is that volatility doesn't just "average out" in the long run; instead, it causes a significant decrease in your annualized returns. This can be a confusing topic; people find it hard to understand, and even hard to believe. It's true though; and the bottom line is that for a typical stock fund your expected annualized return is about one percent less than the number generally given as the "average" or "expected" return rate.

This chart lets you see how this affects the balance of your account.

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Lowered Expectations
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Expected Annual Income Available During Retirement:
Principal   $
Contributions:   $
r:   %
Volatility:   %
During Retirement:    
r:   %
Volatility:   %


The blue bars are the same as the bars in the "simple" calculator on the intro page. The shorter green bars are your true expected balance over time. "Expected" here really means "median": you have a 50/50 chance of doing better than the green bars, and a 50/50 chance of doing worse. The number above the chart shows what your expected annual income will be during retirement; naturally, it's less than the amount predicted by the earlier "simple" calculator.


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