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Volatility Swings
Suppose a crystal ball showed you 20 wonderful stocks that would appreciate by 25% in a year. Would your portfolio be up 25% in one year?
Surprisingly enough, not only will your portfolio not be up 25%, but in all likelihood it would probably be down. You see, while your entire focus was on the fact that these 20 recommended stocks were going to appreciate by 25%, you failed to realize that volatility would have a greater impact on your ROI. Each stock that you expected would make a 25% return did in fact do so, but before it did, each stock fell drastically due to negative market sentiments. In all likelihood, panic would have set in and your stop loss orders would be filled. Subsequently, you likely would end up with a drawdown for the year.

If you think the above is an unlikely scenario, consider this: with the market as volatile as it is, the average stock regularly swings 50% in either direction. With these kinds of volatility swings, you would suffer a substantial drawdown and a major cash crunch on any market sell off. In fact, the odds of you beating the market consistently is directly related to your ability to control the volatility in your portfolio.

One could easily argue that the 20 stocks listed below represented an excellent buying opportunity in 2000. I, on the other hand, will argue that the fact that these stocks represent great value should be secondary to the risk of 68.8% volatility swing. Had you bought these 20 stocks in the year 2000, your portfolio would have suffered a substantial drawdown, and I doubt you would have survived it.
# Stock Volatility
1 IBM 72%
2 JCP 63%
3 AMGN 77%
4 IP 37%
5 INTC 90%
6 C 72%
7 MSFT 52%
8 KO 29%
9 AMAT 90%
10 AOL 127%
11 CAT 49%
12 F 73%
13 G 31%
14 GE 58%
15 GM 59%
16 HON 94%
17 SUNW 138%
18 MO 36%
19 NKE 46%
20 ORCL 83%
  Average 68.8%

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