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I'm 35 and I want to start investing for my retirement. My question is, why would you care about volatility if your investment horizon is 30+ years? In order to get a more clear picture of volatility risk, I gathered some data in Python and computed portfolios with varying percentages of risk-free bonds, with a buy and hold of 100k USD initial:

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Portfolios of VGT and bonds

Looking at the graphs, the only reason I could think of is that when you need your money in times of bearish markets, you can lose 30-40% of your capital. But if you can miss the money, and won't need to withdraw it early, why would one care about volatility?

Edit Someone requested to see what would happen if you invested on the peak just before the 2008 crash.

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As you can see the timing would have meant five years of a negative balance, before you broke even again.

Mark
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3 Answers3

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If you really do not need to withdraw the money, it is just for psychological reasons. Excessive volatility makes many people uneasy and probably rightfully so given the amount of money involved after a few years of saving.

However, there is a caveat to this. At some point you will need to withdraw money and high volatility will increase the risk that you cannot withdraw money at a good price. This is why it is recommended to reduce the allocation to risky assets as one approaches retirement

Manziel
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At age 35, a 100% stock allocation makes intuitive sense, because as you mentioned, you have the time to ride out volatility.

At age 20, a 200% (levered) allocation could make sense: Lifecycle Investing

To simulate retirement scenarios, finance professors use Monte Carlo analysis. A piece of commercial software based on academic research is MaxiFi.

To encourage individual investors to ignore volatility, Bogleheads (advocates of low-cost investing) adopt a Lazy Portfolio.

Orange Coast- reinstate Monica
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People care about risk, and volatility is part of that. Just because in the past volatility could be "ignored" or "has averaged out" over a timespan of 30 years (say), this does not mean that it is guaranteed to remain true in the future. For example, there could be a long series of crahes caused by some unfortunate chain of global crises, or in 2045 betting on volatility suddenly becomes such a thing as betting on GameStop, cryptocurrency, you name it...

B K
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