My Foolish colleague and lead analyst for Motley Fool Income Investor, Mathew Emmert, has the following quote from Hank Blaustein on his Foolish profile page:

"What have I learned in life? I have learned this: If you are down by 70%, then up by 70%, you have NOT broken even."

The math behind that statement is simple enough. Start out with \$100, lose 70% (\$70), and you're left with \$30. Then, off the new base of \$30, gain 70% (\$21), and you're only back to \$51. That's an extremely painful investing lesson to learn -- just ask anyone who purchased General Electric (NYSE:GE) in early 2000.

Just how painful is volatility?
On a recent trip, I had a good 16 hours of travel time to kill, so I flipped through Just One Thing, a collection of investor insights edited by John Mauldin. I recommend it for any investor. A chapter by Ed Easterling, titled "Risk is Not a Knob," has a great discussion on volatility and all of its potential evils -- remember, volatility is your friend when it makes prices low and allows you to buy.

The book includes a table of sample portfolios similar the one below. Each sample portfolio earned an average return of 10%, but the more variable the annual returns, the lower the actual returns to the investor. It makes a good case for tracking not just annual returns but total compounded returns. (That is, if you aren't doing so already.)

Portfolio 1

Portfolio 2

Portfolio 3

Portfolio 4

Year 1 Return

10%

7%

6%

23%

Year 2 Return

10%

4%

9%

-9%

Year 3 Return

10%

12%

4%

0%

Year 4 Return

10%

17%

21%

26%

Average

10.00%

10.00%

10.00%

10.00%

CAGR

10.00%

9.89%

9.81%

8.98%

Beginning Value

\$10,000.00

\$10,000.00

\$10,000.00

\$10,000.00

Ending Value

\$14,641.00

\$14,582.13

\$14,539.55

\$14,103.18

You can see the same effect by taking individual stocks, calculating their average growth rates, then figuring out their compound annual growth rates. I did this for former tech titans Microsoft (NASDAQ:MSFT) and Cisco (NASDAQ:CSCO) and found that they returned an average of 9.56% and -2.66%, respectively, over the past five years. However, on a compound basis, Microsoft returned 7.03% per year, while Cisco delivered -12.46% per year. This shows a fair amount of volatility in both companies, but a great deal more in Cisco.

So here's the logical question: Is it possible to contain volatility and still earn the rewards one expects from investing in stocks?