Volatility
How much and how quickly an investment’s price moves up and down over time, often measured by the standard deviation of returns.
What it means
Volatility describes the size of an investment’s swings. A savings account barely moves, a broad bond fund moves somewhat, and individual stocks or cryptocurrencies can move a great deal in a single day. Analysts usually measure it with standard deviation, which shows how widely returns tend to spread around their average.
Volatility is often used as a stand-in for risk, but they are not identical: a volatile investment held for decades may be less risky for a long-term goal than it looks, while a stable one may fail to keep up with inflation. High volatility is most dangerous when money is needed soon and might have to be withdrawn during a drop.
Formula
Standard deviation = √( Σ (rᵢ − r̄)^2 ÷ (n − 1) )
- rᵢ = each period’s return
- r̄ = average return across the periods
- n = number of periods
- Σ = sum over all periods
Example
For example, two funds could both average 6% a year over a decade. If one stays between 3% and 9% each year while the other ranges from −20% to +30%, the second is far more volatile.
How it’s used
- Comparing the riskiness of funds or asset classes
- Deciding how much stock to hold for short-term goals
- Preparing emotionally for normal market swings
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.