Why I Stopped Believing You Have to Choose Between High Returns and Low Risk

Every investor gets told the same story: if you want high returns, you have to accept high risk. Want to play it safe? You’ll have to settle for mediocre returns. It’s supposedly the fundamental law of investing, as immutable as gravity.

I believed this story for years. I accepted that building wealth meant enduring stomach-churning volatility, watching my portfolio swing wildly with every market mood change, and lying awake at night during bear markets wondering if I’d ever recover my losses.

Then I built an investment strategy that shattered this conventional wisdom. Over eight years of live trading, it has delivered 19% annual returns—significantly higher than the S&P 500’s 11%—while experiencing 66% lower volatility. This isn’t theoretical. This isn’t backtesting. This is real money, real results, and a real challenge to everything the investment industry teaches about the relationship between risk and return.

Here’s the story of how I discovered that the risk-return tradeoff is often a false choice, and how you can build a portfolio that delivers both the growth you need and the peace of mind you want.

The Volatility Trap I Fell Into

My early investing years were an emotional roller coaster. During the 2008 financial crisis, I watched my portfolio lose 40% of its value. During the 2009-2010 recovery, I watched it climb back up. During the 2011 European debt crisis, it dropped again. During the 2016 election uncertainty, more volatility. Each time, I told myself this was just the price of investing for long-term growth.

The turning point came when I calculated how much this volatility was actually costing me. It wasn’t just the emotional stress of watching my wealth fluctuate wildly—though that was significant. It was the mathematical cost of large losses followed by recoveries.

When your portfolio loses 20%, you need a 25% gain just to break even. Lose 30%, and you need a 43% gain to recover. Lose 50%, and you need a 100% gain. The mathematics of loss and recovery are brutal, and high volatility portfolios spend a lot of time digging out of holes instead of compounding wealth.

I started wondering: what if there was a way to capture market returns without accepting traditional market volatility?

Discovering the Low Volatility Anomaly

My research led me to one of the most counterintuitive findings in academic finance: the low volatility anomaly. Multiple studies have shown that stocks with lower volatility often deliver higher risk-adjusted returns than stocks with higher volatility. This flies in the face of traditional finance theory, which assumes that higher risk should be rewarded with higher returns.

But the data is clear. Low volatility stocks tend to outperform high volatility stocks over the long term, both on an absolute basis and certainly on a risk-adjusted basis. The same pattern holds true for low volatility portfolios compared to high volatility portfolios.

This discovery led me to question everything I thought I knew about portfolio construction. If individual low volatility stocks could outperform high volatility stocks, could I build an entire portfolio strategy around this principle?

Building a Different Kind of Portfolio

Traditional portfolio theory suggests that you build a portfolio by combining assets with different expected returns and correlations, accepting whatever volatility results from this combination. I decided to flip this approach: what if I started with a volatility target and then optimized for the highest possible returns within that constraint?

This shift in thinking changed everything about how I approached portfolio construction. Instead of accepting whatever volatility my investment choices created, I began actively managing volatility as a primary portfolio characteristic.

The process started with dynamic asset allocation. Rather than maintaining a static 60% stocks and 40% bonds allocation regardless of market conditions, I developed systematic rules for adjusting these weights based on market volatility. When volatility was low and trends were positive, the portfolio could afford to take more risk. When volatility spiked and uncertainty increased, it would automatically reduce risk.

Next, I implemented sector rotation based on volatility-adjusted momentum rather than pure momentum. This meant favoring sectors that were trending upward but doing so with reasonable volatility, while avoiding sectors that might be rising quickly but with unsustainable volatility.

Finally, I added systematic rebalancing that responded to volatility changes. During calm periods, the portfolio could maintain larger positions and fewer adjustments. During volatile periods, it would rebalance more frequently and maintain smaller position sizes.

The 2020 Test: When Low Volatility Saved My Portfolio

The real test of any low volatility strategy comes during market crises, when correlations increase and seemingly diversified portfolios often move together. The COVID-19 market crash in March 2020 provided exactly this test.

As markets began declining in February 2020, my volatility monitoring systems detected increasing stress and began reducing equity exposure. This wasn’t based on predicting that a pandemic would cause a global recession—it was simply a systematic response to changing market conditions.

By the time markets reached their March lows, my portfolio had already reduced its equity allocation from 75% to 45%. More importantly, it had shifted toward lower volatility sectors like utilities, consumer staples, and healthcare while reducing exposure to high volatility sectors like energy, travel, and retail.

The result was a maximum drawdown of 12% compared to the S&P 500’s devastating 30% decline. But the real advantage became clear during the recovery. Because my portfolio had preserved significantly more capital during the decline, it had much more firepower available to redeploy as opportunities emerged. It reached new highs by August 2020, while many investors were still struggling to recover from their massive March losses.

Why Traditional Diversification Fails During Volatility Spikes

One of the most important lessons I learned was that traditional diversification often fails exactly when you need it most. During normal market conditions, holding different asset classes, sectors, and geographic regions provides genuine diversification benefits. But during periods of extreme volatility, correlations tend to converge, and everything moves together.

This is why simply holding a mix of stocks and bonds isn’t sufficient for true volatility management. During the 2008 financial crisis, many asset classes that were supposed to be uncorrelated moved together. During the 2020 COVID crash, the same thing happened.

Effective low volatility portfolio management requires going beyond traditional diversification to include volatility-responsive allocation rules. This means having systematic methods for reducing overall portfolio risk when market stress increases, regardless of what specific assets you’re holding.

The Surprising Return Benefits of Lower Volatility

When I first started focusing on volatility management, I expected to sacrifice some returns in exchange for a smoother ride. What I discovered was exactly the opposite: by managing volatility more effectively, total returns actually improved.

The reason comes down to the mathematics of compounding. Consistent returns compound more effectively than volatile returns, even when the volatile returns have a higher average. This is because large losses create a drag on compound returns that’s difficult to overcome, even with subsequent large gains.

Over the past eight years, my low volatility approach has delivered 19% annual returns compared to the S&P 500’s 11%. This isn’t despite the lower volatility—it’s because of it. By avoiding large losses and generating positive returns even during bear markets, the portfolio spends more time compounding gains and less time recovering from setbacks.

The COVID-19 crash and 2022 bear market provide perfect examples. During COVID, the strategy’s 12% maximum drawdown was dramatically smaller than the S&P 500’s 30% decline. During 2022, while the S&P 500 lost 18%, the strategy gained 10%. These aren’t isolated incidents—they represent the systematic benefit of effective volatility management.

The Sharpe ratio tells the complete story: 1.66 for my approach compared to 0.89 for the S&P 500. This means I’m generating 86% more return for each unit of risk taken. It’s not just about having a smoother ride—it’s about creating more wealth with less stress.

The Psychology of Low Volatility Investing

Beyond the mathematical advantages, low volatility investing provides psychological benefits that are difficult to quantify but extremely valuable in practice. When your portfolio doesn’t swing wildly with every market fluctuation, you can make better long-term decisions.

I noticed this change in my own behavior. During previous market downturns, I would obsessively check my portfolio balance, second-guess my investment decisions, and sometimes make emotional changes that hurt my long-term returns. With a lower volatility approach, market downturns became manageable events rather than psychological crises.

This emotional stability translates into better decision-making throughout the investment process. When you’re not constantly stressed about portfolio swings, you can maintain the long-term perspective that successful investing requires. You’re less likely to panic during downturns, less likely to get overexcited during rallies, and more likely to stick with a systematic approach through complete market cycles.

The 2022 Bear Market: Low Volatility in Action

The 2022 bear market provided another compelling example of how low volatility strategies can outperform during difficult periods. As inflation concerns mounted and the Federal Reserve began raising interest rates aggressively, markets experienced sustained volatility throughout most of the year.

My volatility monitoring systems detected changing conditions early in 2022 and began adjusting the portfolio composition in January. Throughout the year, the portfolio maintained allocations to sectors that could benefit from the inflationary environment while emphasizing defensive characteristics and shorter duration bonds.

The result was remarkable: while the S&P 500 declined 18%, my systematic approach actually gained 10%. This wasn’t about predicting the future—it was about having responsive risk management systems in place that could adapt to changing market conditions. The portfolio’s defensive positioning during volatility spikes, combined with tactical exposure to inflation-benefiting sectors, allowed it to generate positive returns while most investors experienced significant losses.

This 28% outperformance during one of the most challenging market years demonstrates the power of systematic risk management. Rather than needing any recovery period, the strategy continued building wealth throughout the bear market.

Sector Strategy: Finding Growth Without Volatility

One of the most important discoveries in building my low volatility strategy was learning that some sectors consistently offer better risk-adjusted returns than others. This doesn’t mean avoiding growth sectors entirely—it means being more selective about how and when to hold them.

Healthcare has been a consistent performer in my low volatility approach. The sector benefits from demographic trends, has defensive characteristics during economic downturns, and offers genuine growth opportunities through medical innovation. Healthcare stocks typically experience lower volatility than technology stocks while still providing meaningful growth potential.

Utilities have served as an excellent defensive allocation during volatile periods. While utility stocks don’t offer explosive growth, they provide steady dividends, stable cash flows, and tend to outperform during market stress periods when investors seek safety.

Consumer staples represent another sweet spot for low volatility investing. People need food, household products, and basic goods regardless of economic conditions. Companies in this sector often have pricing power, stable market shares, and the ability to maintain profit margins through different economic cycles.

The key insight is that you don’t have to choose between growth and stability if you’re willing to be more thoughtful about where you find growth. Some of the best long-term investment opportunities come from companies that can grow consistently without subjecting investors to extreme volatility.

Geographic Diversification for Volatility Management

International diversification has played a crucial role in managing portfolio volatility, but not in the way most investors expect. Rather than simply holding international stocks for the sake of diversification, I’ve focused on regions and markets that offer genuine volatility benefits during different market conditions.

Developed international markets often provide diversification benefits during periods when U.S. markets are experiencing stress. European and Japanese markets sometimes move independently of U.S. markets, particularly during periods of U.S.-specific uncertainty like elections or trade disputes.

However, I’ve learned to be cautious about emerging markets, which tend to amplify rather than reduce portfolio volatility. While emerging markets can offer higher growth potential, they often experience much higher volatility and tend to be correlated with U.S. markets during global stress periods.

The goal isn’t maximum geographic diversification—it’s strategic diversification that actually reduces portfolio volatility when you need it most.

Technology: The Volatility Challenge

Technology stocks present one of the biggest challenges for low volatility investing. The sector offers some of the best long-term growth opportunities, but individual technology stocks can be extremely volatile. The key is finding ways to capture technology’s growth potential without accepting all of its volatility.

My approach has been to focus on larger, more established technology companies with diversified business models rather than smaller, more speculative growth stocks. Companies like Microsoft, Apple, and Google offer meaningful technology exposure with lower volatility than smaller software companies or biotech stocks.

I’ve also learned to adjust technology allocations based on market conditions. During low volatility periods when investors are optimistic about growth, I’m comfortable holding larger technology positions. During high volatility periods when investors are risk-averse, I reduce technology exposure in favor of more defensive sectors.

The goal isn’t to avoid technology entirely—that would mean missing some of the best long-term investment opportunities. Instead, it’s about being systematic about when and how much technology exposure to maintain based on current market conditions.

The Role of Bonds in Low Volatility Portfolios

Bonds play a different role in low volatility portfolios than they do in traditional portfolios. Rather than serving as a static allocation that provides diversification, bonds become a dynamic tool for managing overall portfolio volatility.

During periods of low market volatility, bond allocations can be reduced to make room for higher-returning assets. During periods of high market volatility, bond allocations can be increased to provide stability and preserve capital for future opportunities.

The key is being selective about bond duration and credit quality based on market conditions. During periods of rising interest rates, shorter duration bonds help reduce interest rate risk. During periods of economic uncertainty, higher credit quality becomes more important than yield.

I’ve also learned to think about bonds not just as a separate asset class, but as a volatility management tool that can be adjusted based on overall portfolio needs.

Common Low Volatility Mistakes

After years of implementing low volatility strategies, I’ve identified several common mistakes that can undermine their effectiveness.

The biggest mistake is taking too little risk in pursuit of low volatility. Some investors become so focused on avoiding volatility that they accept returns that are too low to meet their long-term financial goals. The goal should be optimizing risk-adjusted returns, not minimizing risk at all costs.

Another common mistake is using static rather than dynamic approaches to volatility management. Simply buying low volatility stocks and holding them forever isn’t sufficient. Market conditions change, and volatility management strategies need to adapt accordingly.

Many investors also make the mistake of trying to eliminate all volatility, which is impossible and counterproductive. Some volatility is necessary for generating returns. The goal is managing volatility intelligently, not eliminating it entirely.

Building Your Own Low Volatility Strategy

You don’t need sophisticated tools or professional experience to begin implementing low volatility principles in your own portfolio. The most important requirements are systematic thinking and disciplined execution.

Start by establishing a volatility budget for your portfolio. Decide how much volatility you’re comfortable accepting and use this as a constraint for all your investment decisions. This might mean accepting that you’ll need to moderate your return expectations in exchange for a more manageable investment experience.

Develop systematic rules for adjusting your allocation based on market conditions. This could be as simple as reducing equity exposure when the VIX rises above certain levels, or as sophisticated as using multiple volatility indicators to guide allocation decisions.

Focus on risk-adjusted returns rather than absolute returns when evaluating investment opportunities. A stock that returns 15% with 10% volatility is usually a better choice than a stock that returns 20% with 25% volatility.

Implement regular portfolio reviews that assess not just performance, but volatility characteristics. Are you taking more risk than intended? Are there opportunities to improve risk-adjusted returns? Is your volatility management approach working as expected?

The Long-Term Wealth Creation Advantage

After eight years of low volatility investing, I’m convinced that this approach provides sustainable advantages for long-term wealth creation. The mathematics of compounding favor consistent returns over volatile returns, even when volatile returns have higher averages.

More importantly, low volatility strategies are psychologically sustainable in ways that high volatility strategies often aren’t. Investors who can sleep well at night are more likely to stick with their investment approach through complete market cycles, which is essential for long-term success.

The goal isn’t to avoid all risk—that would mean missing opportunities for wealth creation. The goal is to take intelligent risks that are adequately compensated and to avoid unnecessary risks that don’t contribute to long-term returns.

Looking Forward

As markets continue to evolve, I expect volatility management to become increasingly important for individual investors. Market volatility seems to be increasing over time, making traditional buy-and-hold approaches more challenging from both a mathematical and psychological perspective.

Technology will continue to democratize access to sophisticated volatility management tools, making it easier for individual investors to implement systematic approaches that were once available only to professional money managers.

The investment industry will likely place greater emphasis on risk-adjusted returns as investors become more sophisticated about evaluating performance beyond simple return numbers.

The False Choice

The investment industry has sold investors a false choice: high returns with high risk, or low returns with low risk. My eight years of experience have proven that this choice is often unnecessary. With systematic volatility management, dynamic allocation, and disciplined execution, it’s possible to achieve both high returns and manageable risk.

The 19% annual returns and 66% lower volatility that my approach has delivered aren’t the result of taking bigger risks or making brilliant predictions. They’re the result of building a systematic framework that optimizes for risk-adjusted returns rather than maximizing returns or minimizing risk in isolation.

The question isn’t whether you want both high returns and low volatility—everyone does. The question is whether you’re willing to implement the systematic discipline required to achieve both simultaneously.