The hidden tax silently costing you returns

As an investor, you are aware of the costs that eat into your returns, brokerage fees, platform fees and taxes on capital gains. But what if the largest fee you pay is one you never heard of?

- Maboko Seabi

It is a hidden cost, not charged by any broker nor the government but imposed by the laws of mathematics. It is called volatility drag and it is the silent tax on your portfolio that can potentially impact your long-term wealth.

Let us start with a simple puzzle.Imagine two investors, Sihle and Tom. They each start with R100 and invest for two years.

► Sihle's portfolio A earns exactly +10% in year 1 and +10% in year 2.

► Tom's portfolio B has a more exciting ride, earning +30% in year 1 and then losing -10% in year 2.

A quick glance suggests they should be in the same position. After all, the average annual return for both portfolios is 10%.

But they are not in the same position. Let us do the math.

► Sihle (low volatility): His R100 grows to R110 in year 1. In year 2, he earns 10% on that R110, growing to R121.