The Biggest Loss Is Raising Your Volatility

When you reduce your volatility because the market has been moving very fast and you're making money, what happens? You get to a certain point where the volatility is high and the returns don't justify the volatility. And so even though you've targeted 12% volatility, which implies a certain amount of return, you see sometimes the volatility will drop to 8% or even 6%. At that time, you actually have reduced your return by almost 50%. If you don't bring your volatility back up by increasing the size of your position, you will wind up earning half of what you expect to earn. So in the long run, your real performance will never match your theoretical performance.

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