The Surprising Truth About Volatility

True or false? It doesn’t matter how much an investment goes up or down in value, as long as the average return over time is good.

If you chose “true,” you’re wrong. But you’re not alone. Many investors don’t realize the impact volatility can have on returns over time.

The reason for this impact is compounding. That’s the return calculated not just from the initial investment amount, but also on any accumulated returns of prior periods.

Compounding results in greater investment outcomes when there’s less volatility in the portfolio return. Take a look at the hypothetical example below of two different funds, each averaging a 10% return over five years.

impact of volatility on investment outcomes

This example is for illustration purposes only, does not reflect any mutual funds or indices, and does not represent performance of any Principal Fund.

Despite their identical average returns, Fund A was worth over 4% more than Fund B after five years. That’s because Fund A’s performance was less volatile.

One strategy called liquid alternatives may help smooth the ups and downs in the markets and seek to:

  • Enhance long-term returns/value through the benefits of compounding.
  • Achieve a higher level of diversification.
  • Reduce portfolio volatility.

Investors should contact their financial professional to discuss how liquid alternatives may fit in their portfolios.

Add asset allocation/diversification disclosure

To obtain a prospectus, download online or call Customer Service at 1.800.222.5852.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.

Investment risk may be magnified with the use of alternative strategies; liquid alternatives are subject to market risk. When using hedging strategies investors should not expect significant outperformance during market rallies. It is possible to lose money when investing in mutual funds.