How market volatility actually affects a portfolio

[John Teachout]

I'm sure most on here know this but there are some that don't realize what these wildly fluctuating swings in the market are actually doing to the value of their stocks.

In our hypothetical example we'll use a market fluctuation of an S&P 500 ETF indexed fund of 50% down, 50% up, 50% down, 50% up, 50% down, 50% up. Some people would look at that and think, oh, we're right back where we started, what a relief.

Here's what actually happened to your $100,000 fund. 50% down = $50,000. 50% up = $75,000. 50% down = $37,500. 50% up = $56,250. 50% down = $28,125 and 50% up = $42,188.

So your $100,000 has now become $42,188 and not exactly "right back where you started". The more fluctuations there are, the more diminished this becomes and at this point in the example, even 100% increase which would double the remaining amount leaves you short of the starting point. It will take a long period of growth to "get back" what has dissipated.