From Market Turbulence to Divine Stability: Lessons for Life
Your co-worker, Sarah, is telling you about a stock she purchased. Returns are extremely volatile, but she isn’t concerned about that since she is a long-term buy-and-hold investor. One day she proclaims, “I don’t mind the ups and downs – it all averages out, right?”
Wrong.
The hidden cost of volatility drag
Consider the following 4 scenarios that each have a 10% average return but get to that average in very different ways.
While the (arithmetic) average return is 10% in all 4 scenarios, the volatility increases as you move to each subsequent scenario.
Imagine you invest $1,000 and do nothing for 30 years. The below chart shows how wrong your colleague is.
In Scenario A (no volatility), your investment has grown impressively to $17,450. However, the roller coaster returns of Scenario D yield a portfolio of just $5,475. That’s a mere 31% of Scenario A!
This happens because the individual annual returns interact with each other to produce the overall portfolio growth. For a deep dive on the math, see the postscript. TLDR: For a given average return, portfolio growth is maximized when the individual annual returns are equal (i.e. no volatility).
As volatility increases, so too does the “volatility drag” – i.e., the “lost” portion of the return. Scenario D yields the same result as a no-volatility investment that has a 5.8% annual return, as 4.2% of the return is lost due to its volatility.
This “no volatility equivalent” is known as the “geometric average”, which factors in the volatility drag. Here’s a more complete picture of our scenarios.
Let’s return to the real world.
Since 1928, the S&P 500 has had an arithmetic average return of 11.7% and a volatility drag of 1.9%. This has produced an incredible geometric return of 9.8% for investors.
In my last post, I critiqued Dave Ramsey for not properly understanding this distinction. He erroneously tells his audience they can project their portfolio growth using the 11.7% arithmetic average return. Wrong! The magnitude of his error is the equivalent of thinking scenario C will actually be scenario A. This is a really big mistake - scenario A ends 66% higher than scenario C in our example.
All other things equal, consistency yields far better outcomes than variability.
But what does this have to do with God?
God’s unchanging nature
Scripture teaches us that God is immutable – i.e. that his character does not change.
In Malachi, God says, “For I the Lord do not change” (Malachi 3:6).
In the New Testament, James writes, “Every good gift and every perfect gift is from above, coming down from the Father of lights, with whom there is no variation or shadow due to change” (James 1:17).
The writer of Hebrews declares: “Jesus Christ is the same yesterday and today and forever” (Hebrews 13:8).
God is perfect and eternal. It makes sense that his character must be immutable – if it changed, then that would imply that He either wasn’t perfect before, or He is no longer perfect. Neither of those options is consistent with orthodox Christianity.
I think an extension of God’s immutable character is the consistency in his behavior.
As God prepares to give Moses the ten commandments for a second time, we read:
The LORD passed before him and proclaimed, "The LORD, the LORD, a God merciful and gracious, slow to anger, and abounding in steadfast love and faithfulness…
Exodus 34:6 (ESV)
For sure, Jesus gets angry occasionally (e.g., when he cleansed the temple of the money changers). But this is a relatively rare occurrence. The above text from Exodus is one of many that tells us that God is “slow to anger”. He is consistent. Low volatility.
Additionally, Moses learns that God’s character is one of “steadfast love” (hesed in Hebrew). The word connotes loyalty, covenant, devotion, mercy, and grace. Hesed is also used multiple times in the story of Ruth – a wonderful tale of loyalty, commitment, and love.
God’s steadfast love is beautiful. It is stable and unwavering. It can be relied upon.
Implications for us
From two very different lenses, we have explored the virtue of consistency. What does that mean for our lives?
As a father, I want to be consistent with my children: in my teaching, my discipline, my support, and my temperament. The kids shouldn’t have to wonder “which dad” they are going to get each day.
At work, I hope I’m the same person around the CEO as I am with the junior team member.
In a crisis, I want to maintain a calm and collected demeanor.
This steady type of personality can be perceived by some as boring. A good friend of mine used to equate it to “oatmeal”, contrasted with the excitement of Lucky Charms. (His advice was always to at least make it Apple Cinnamon oatmeal!)
In our portfolios, we accept some volatility to earn higher returns. But in our lives, let’s strive for steadfastness. After all, volatility is a drag.
Postscript: A deep dive into the math
For the mathematically curious, let’s unpack why equal returns maximize overall growth.
Imagine a two-year time horizon, where r1 and r2 represent the returns in each respective year.
Final Value = Starting Value * (1+ r1) * (1+ r2)
Together, the term in red can be thought of as the cumulative growth factor. To maximize our final wealth, we need to maximize this term.
We can visually think of this as a rectangle where (1+r1) is the length and (1+r2) is the width. Thus, our cumulative growth factor is the area of the resulting rectangle.
Time travel back to high school math: Given a fixed perimeter (let’s say 40), what length (L) and width (W) create a rectangle with the largest area?
Spot checking some possibilities, you find you are not able to beat the area of 100 formed by a perfect square:
More rigorously, we can try each integer combination of L and W and plot the resulting area on a graph to prove our hypothesis.
By the same logic, to maximize our growth factor (1+ r1) * (1+ r2), we now know that r1 and r2 need to be identical. The same conclusion holds for longer time horizons.
And if you really want to have fun, you could dust off your calculus skills to prove this relationship! Who am I kidding? It’s 2025. Type the following into Google and its AI engine will show you each step of the calculus solution!
Search: “calculus proof that square has largest area of a rectangle with a given perimeter”