Volatility

Volatility measures how much your portfolio fluctuates. Learn to interpret it and why it should not drive poor investment decisions.

Definition

Volatility measures the dispersion of a portfolio's returns around its mean, typically expressed as annualised standard deviation. A high-volatility portfolio experiences large swings in value, while a low-volatility one is more stable. It is not synonymous with risk of permanent loss, but it does indicate how much your investment value can fluctuate in the short term.

For index fund investors with a long time horizon, day-to-day volatility is irrelevant. What matters is not letting short-term fluctuations trigger panic selling decisions. Historically, the MSCI World has an annualised volatility of approximately 15-17%.

Index Balance shows the annualised volatility of your full portfolio, which is typically lower than that of each individual fund thanks to diversification across assets with less-than-perfect correlation.

Practical example

A portfolio with 14% annualised volatility can expect that in two-thirds of years, its return will fall within ±14% of the average. If the average return is 8%, most years will land between -6% and +22%. An extreme year (within two standard deviations) could reach -20% or +36%.