Standard Deviation

Standard deviation measures the volatility of your portfolio. Discover how to interpret this risk indicator and calculate it automatically with Index Balance.

Definition

Standard deviation is a statistical measure that indicates how much the returns of an investment are dispersed around their average. In finance, it is the most common way to quantify volatility: an annual standard deviation of 15% means that in any given year, the portfolio's return is likely to be approximately within ±15% of its average, in 68% of cases (assuming a normal distribution).

For the index fund investor, standard deviation is the foundation of most risk metrics, including the Sharpe ratio and the Sortino ratio. Historically, global equities have a standard deviation of around 15–18% per year, compared with 5–8% for government bonds. This is not bad in itself: higher standard deviation means more swings, but also greater long-term return potential if the investor stays calm.

Index Balance lets you see your portfolio's standard deviation updated automatically and compare it against your benchmark. Try it free at indexbalance.com.

Practical example

Your index fund portfolio has an average annual return of 9% and a standard deviation of 16%. This means that in roughly 2 out of every 3 years, your return will be somewhere between -7% and +25%. In 1 out of 3 years it could fall outside that range. Knowing this in advance helps you stay calm in bad years and avoid overreacting in good ones. Index Balance calculates this automatically every time you update your portfolio.