The Marketing Trap of “Higher Returns with Lower Volatility”

Knowing that investors do not like the pain volatility infringes them, the investment industry is always offering new strategies and products with expected higher returns and apparently lower volatility.

This usually leads to concave strategies —when not directly to frauds like Bernie Madoff, who offered nonsensical annual returns of around 12% with volatility around 2% (!)— that are fragile in the long term. They are strategies that seem to work well recently —hence its popularity and attraction—, but inevitably end up exploding. And guess who will pay with his money for the wrong way to approach investing (Hint: it’s not the bank nor the asset manager).

There is no profitability in the markets without some volatility —hence the essential importance of knowing how to manage our own emotions when investing. It is prudent to seek low volatility, but it is reckless to seek the absence of volatility when investing and/or unrealistic quick returns.

In this sense, it is important to understand that the returns, volatility and drawdowns of the Austrian Strategy are a natural consequence of its Austrian assumptions, not an over-fitted reverse engineered process to match a specific and sexy risk-return ratio.