Why a Consistent 10% Beats a Volatile 15% Every Time

If I offered you a choice between two investments — one averaging 15 percent a year and one paying a steady 10 — you would take the 15 without blinking. Almost everyone would. And almost everyone would be making a mistake, because the word "averaging" is hiding something. This is the most important piece of math most investors have never seen.

The average that lies

Say you invest $100,000 and it earns 50 percent one year, then loses 20 percent the next. Your "average" return is 15 percent a year. Sounds great. Now follow the actual dollars.

• Year 1: $100,000 + 50% = $150,000
• Year 2: $150,000 − 20% = $120,000

Two years, $20,000 gained. That is not 15 percent a year — it works out to about 9.5 percent compounded. The 15 percent figure is the arithmetic average. The 9.5 percent is the geometric average — the one your bank account actually experiences. The gap between them is called volatility drag, and it gets worse the wilder the swings become.

Why losses hurt more than gains help

Volatility drag exists because percentage math is not symmetrical. Lose 20 percent, and you need 25 percent to get back to even. Lose 50 percent, and you need 100 percent. The deeper the hole, the disproportionately harder the climb out. A portfolio that never falls into the hole never has to climb.

Run the twenty-year version and the difference is stark. $100,000 compounding at a genuine, steady 10 percent becomes about $673,000. The same money in a portfolio that "averages" 15 percent through wild swings — say +50, −20, repeated — grows at roughly 9.5 percent and lands near $615,000. The steady portfolio wins, even though its "average" looks five points worse at a cocktail party.

The sequence problem

It gets worse the moment you start withdrawing money. Volatile returns and steady returns behave the same only if you never touch the account. Start taking income — as every retiree does — and the order of returns starts to matter enormously. A crash in year two of retirement, while you are pulling out living expenses, does damage a crash in year twenty never could. You are selling more shares at the worst prices, and those shares never recover for you.

An income stream that does not depend on selling anything sidesteps the whole problem. This is precisely what a performing mortgage note is: a contractual payment, the same amount, every month, that does not know or care what the market did.

A worked example, year by year

Here is the twenty-year race in table form, checking in every four years — the end of each full up-and-down cycle. Portfolio A earns a steady 10 percent. Portfolio B alternates +50 and −20, which its brochure calls "a 15 percent average."

Notice the gap is small early and widens every year. Compounding rewards whoever avoids the losing years, and it pays that reward on an accelerating schedule. Stretch the horizon to 40 years and the gap approaches $700,000.

And this example is generous to the volatile portfolio. It assumes the losses arrive politely, one at a time, fully recovered before the next one. Real markets deliver losses in clusters — 2000 through 2002, 2008, 2022 — and each cluster digs the kind of hole that takes years of gains just to refill.

What this means in practice

This is why banks — who understand this better than anyone — are happy to hold billions in mortgage loans yielding single digits. They are not chasing 15. They want the payment that arrives every month, backed by a lien, immune to drama. Boring, at scale, is the most profitable business in the world.

When I evaluate a note, I am not asking "what could this return in the best case?" I am asking "how certain is this payment stream, and what backs it up if I am wrong?" That mindset shift — from maximizing the number to maximizing the certainty of the number — is the single biggest upgrade most investors can make.

Check the math yourself

Do not take my word for it. Take any sequence of returns, apply them to a real dollar amount in order, and compare the ending balance to a steady return with the same "average." Then do it again withdrawing 4 percent a year. The steadier stream wins by more every time you add realism. Volatility is not just uncomfortable. It is expensive.