Investing involves volatility. The higher the expected return, the greater the volatility. This is axiomatic. You can’t avoid it but you can mitigate it, as I wrote in a previous column. And it turns out that reducing volatility has a number of benefits for investors.

First, there’s what’s known as volatility drag. This is a mathematical effect that is an outcome of the fact that a percentage decline in the value of an asset requires a greater percentage increase in order to recover its value. Here’s an example: suppose there’s a stock whose price is currently $100. If the price drops by 20%, its new price would be $80. But in order to get its price back up to where it started ($100), it would take a subsequent increase of 25%.

Now imagine that our $100 stock fluctuates by 5% each day. That is, it’s up 5% one day, down 5% the next day, up again the following day, etc. You might be surprised to learn that after one year the stock would only be valued at about $74. And if that isn’t bad enough, if it were to fluctuate by 10% each day, its price after one year would end up under $29! By reducing volatility in a portfolio we reduce the effect of volatility drag.

There’s another benefit of lower volatility and this one is psychological. The two primary drivers of irrational investor behavior are fear of loss and fear of missing out (FOMO). During periods when volatility is low, investors tend to feel pretty copacetic. But when prices are swinging more wildly – which is most common at the start of bear markets – investors tend to panic. That’s the time when they make their worst investment decisions. So finding ways to keep a portfolio’s volatility down is likely to help you avoid taking actions that are emotionally driven and non-beneficial to your portfolio’s long term health.

I am reminded of the well-known fable of the tortoise and the hare. As you will recall, the two decided to race each other. The hare quickly sprinted far ahead of the slow-moving tortoise, and then, after having completed most of the course, decided to take a rest. He carelessly fell asleep and awoke just in time to see the tortoise plodding across the finish line. The moral: slow and steady wins the race.

Although investing is not a race, the analogy is quite apt. If your investment goal is to ensure you have enough money to support your desired lifestyle from today until you pass away, wouldn’t the ideal strategy be to take on only as much volatility as you need? Investing in riskier assets might provide you with higher returns periodically but might also spawn bigger declines. And the worst-case scenario would be for those losses to occur during periods when you need to sell the assets in order to fund some big ticket spending goal.

It’s a rare individual who has been able to accumulate enough money to limit their investments solely to risk-free assets. The rest of us need to take on some degree of volatility in order to grow our savings sufficiently to support our spending goals. Mitigating that volatility should definitely be considered.