Variance Tax

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Let’s say your portfolio returned +60% in 2024, then fell 40% in 2025. That’s an annualized average return of +10%. Actual return after two years: minus 4% (i.e $100 * 1.6 * 0.6 = $96). That 14-point gap is what we call the variance tax aka variance drain or volatility drag and it’s one of the least intuitive forces in investing. Take any series of returns with arithmetic mean μ…

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