High-yielding, high-volatility portfolios may be the topic of conversation at cocktail parties, but it's the boring, low-volatility portfolio that will maximize an investor's wealth over the long run.

Let's look at two portfolios. Portfolio A has a lot of high-volatility investments and has returned -20%, +25%, and +10% over the past three years, an average return of 5% (-20 plus 25 plus 10, divided by 3). However, because of the wild swings in the return of this portfolio, it has a standard deviation (measure of volatility and risk -- the higher, the more volatile) of 23%. An investor who invested \$100,000 three years ago would have seen this portfolio grow to \$110,000. The total return for the three years was 10%.

Portfolio B has less-volatile investments and a more stable annual return: -10%, +15%, and +10% over the same period, an average return of 5% (-10 plus 15 plus 10, divided by 3). However, because the returns for Portfolio B are in a tighter group, it has a much lower standard deviation of 13%. Because of this, an investor who invested \$100,000 three years ago would have seen this portfolio grow to \$113,850. Total return for the three years was almost 14% -- and it ended up with \$3,850 more than Portfolio A!

How so? Let's look at the math:

Portfolio A

Start: \$100,000

Return Gain/Loss             Portfolio Value

Year 1: -20%                       -20,000 (100,000 times 80%)        \$80,000

Year 2: +25%                      +20,000 (80,000 times 125%)       \$100,000

Year 3: +10%                      +10,000 (100,000 times 110%)     \$110,000

Portfolio B

Start: \$100,000

Return Gain/Loss             Portfolio Value

Year 1: -10%                       -10,000 (100,000 times 90%)        \$90,000

Year 2: +15%                      +13,500 (90,000 times 115%)       \$103,500

Year 3: +10%                      +10,350 (103,500 times 110%)     \$113,850

The impact is even more pronounced if an investor is taking withdrawals from the portfolio. Assume the same investors are retired and have to withdraw \$4,000 per year from their portfolios to meet living expenses. Portfolio B would be worth \$4,290 more than Portfolio A (\$100,390 vs. \$96,100).

How can you reduce the volatility in your portfolio?