Volatility drag
Big swings cost you compounded growth even when the average of the ups and downs looks the same, because losses and gains are not opposites once they are multiplied together.
A worked example
Fall 10%, then rise 10%, and €100 does not return to €100: it becomes €99. The two moves average to 0%, but compounding them loses 1%. Fall 30% then rise 30% and €100 becomes €91, a drag of 9%, even though the average of −30% and +30% is still 0%.
Why it happens
A fall and a rise of the same size are not equal and opposite once money is involved, because the rise has to work on a smaller starting amount after the fall. The bigger the swing, the bigger that starting amount shrinks, and the harder the rise has to work just to break even.
Where leverage makes it worse
Leverage multiplies the size of the swings, so it multiplies this drag too. Past a certain point, adding more leverage to something volatile can lower your expected result even if it raises the size of each individual move.
The practical takeaway
A smoother ride is not just more comfortable: it is mathematically worth something, because it loses less to this drag. This is part of why spreading money across different kinds of holdings, which smooths the overall ride, is not merely about feelings.
Key takeaways
- A fall and an equal-sized rise do not cancel out; compounded together they leave you below where you started.
- Bigger swings create bigger drag, even with the same average return.
- Leverage multiplies the swings, so it multiplies the drag, which can lower results past a certain point.