The volatility tax is a mathematical finance term first published by Rick Ashburn, CFA in a 2003 column, and formalized by hedge fund manager Mark Spitznagel, describing the effect of large investment losses (or volatility) on compound returns.[1] It has also been called volatility drag, volatility decay or variance drain.[2][3] This is not literally a tax in the sense of a levy imposed by a government, but the mathematical difference between geometric averages compared to arithmetic averages. This difference resembles a tax due to the mathematics which impose a lower compound return when returns vary over time, compared to a simple sum of returns. This diminishment of returns is in increasing proportion to volatility, such that volatility itself appears to be the basis of a progressive tax. Conversely, fixed-return investments (which have no return volatility) appear to be "volatility tax free".
^Not all risk mitigation is created equal, Pensions & Investments, November 20, 2017
^"The Myth of Volatility Drag (Part 1)". 23 March 2015.
^Thomas E. Messmore (1995). "Variance Drain". The Journal of Portfolio Management. 21 (4): 104–110. doi:10.3905/jpm.1995.409536. S2CID 219239961. Retrieved November 11, 2019.
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