How Soccer Explains the Volatility Gap

As the game of soccer has evolved, the significance of a great midfielder — adept at both offense and defense — has become paramount.

As investors, we see parallels in the financial world.

What was once a set and rigid for investors – aka the 60/40 portfolio structure based on 60% equities for growth and 40% bonds for risk protection – is now more open and fluid. To use the soccer analogy again, equities are like the forward and wingers of the financial game, focused on offense with high volatility and high reward. Bonds, with their relative stability, are your defense, offering yield with a potential buffer against downturns. Cash, the ultimate safety net, is your goalkeeper. It preserves capital and offers liquidity, waiting to be called into action.

But in finance, like in soccer, the Volatility Gap™ between equities and bonds can similarly expose a portfolio to potential losses.

Think about that 60/40 portfolio. 

The risk is in the asset allocation itself, and most advisors are overlooking it.

Notably, 93% of the volatility in a traditional 60/40 portfolio is rooted in its equities portion. Given the historical standard deviations and drawdowns of the asset class given their higher volatility, equities contribute disproportionately to the portfolio’s overall volatility.

The result? Equities are delivering high returns to investors with a lot of volatility, but fixed income is not negating that volatility. They’re actually matching it, with almost no return.

That’s the volatility gap, and it is inherent in any stock – bond portfolio.