Volatility

Some investments move gently, while others jump around a lot. A government bond might change in price by a fraction of a percent on a typical day, while shares in a small technology company might rise or fall by 5% or more.

Volatility is usually measured by the standard deviation of returns, often expressed as an annual percentage. An investment with annual volatility of 20% has experienced much larger swings than one with volatility of 5%.

For example, two funds might both average returns of 7% a year over ten years. If one rose and fell steadily within a narrow range while the other swung between gains of 30% and losses of 20%, the second is far more volatile, even though the average is the same.

Volatility is often used as a measure of risk, because it shows how uncertain an investment's value is in the short term. It matters most to investors who may need to sell at a particular time. For long-term investors, short-term volatility can be less important than long-term returns, as long as they can avoid selling during a downturn.