Volatility Effects II: Uncertainty

The main effect of volatility is uncertainty in your investment's performance - including the risk that it will underperform its theoretical expected value by a significant margin. This graph is designed to let you see how bad things can get. It uses a random process to draw a different "typical" outcome each time you run it. After each run you can see how the typical performance (in orange) compared with the expected performance (in green).

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Principal   $
Contributions:   $
r:   %
Volatility:   %
During Retirement:    
r:   %
Volatility:   %


After you run the graph a few times you'll see that the orange bars are completely out of control, sometimes outperforming the expected green bars by a huge margin, and sometimes falling short and running out of money years too early. What you're seeing is what volatility is all about: the fluctuations in the return rate definitely do not "average out" over time; instead they can make your balance end up far away from your expectations. This much uncertainty is more than most people would be willing to live with in their retirement plans.

To try to get some control over the outcomes, check the little box at the right, and then run the calculator a few more times... and suddenly things look a lot better (although still not perfect). What the little box does is mimic some of the same things you can do with your own investments:

  • It increases its contributions by up to 10% during working years;

  • It postpones retirement by up to three years;

  • It decreases spending by up to 10% during retirement.

It takes these actions in any year when the orange bar falls short of the expected green bar. To make your own outcome approximate the expected outcome, you may need to make some of these same adjustments.




Use adaptive behavior


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