Volatility
What it means when an investment swings up and down, why higher expected returns come with bigger swings, and why a fall is not the same as a permanent loss.
Key idea
Volatility is how much and how quickly an investment's price moves up and down. Investments that can grow more, like stocks, usually swing more along the way. A fall is a loss on paper until you sell, but holding on doesn't guarantee that the price comes back.
What it is
Volatility describes how much and how quickly an investment's price moves up and down. A savings account barely moves. A bond fund moves a little. A stock fund can rise 20% in one year and fall 15% the next. Professionals measure volatility as the standard deviation of returns: the bigger the number, the wider the swings around the average.
Three investments, five years
The years below are made up to show the pattern. They are not a forecast. CHF 10,000 goes into cash, bonds and stocks each:
| Year | Cash | Bonds | Stocks |
|---|---|---|---|
| 1 | +1% | +4% | +20% |
| 2 | +1% | −3% | −15% |
| 3 | +1% | +5% | +25% |
| 4 | +1% | +1% | −10% |
| 5 | +1% | +3% | +15% |
After five years, the CHF 10,000 had become 10,510.10 in cash, 11,019.27 in bonds and 13,196.25 in stocks. Stocks ended highest, but the ride was rough: in year 2 the stock money dropped from 12,000.00 to 10,200.00, and in year 4 from 12,750.00 to 11,475.00. Bonds dipped once, by 3%. Cash never dipped, and grew the least. The stock years also averaged +7%, yet the money grew only 5.70% a year. Swings cost return, because a 15% fall needs a 17.6% gain to make up.
What it means for you
Volatility matters in three ways:
Risk vs return
Investments that can earn more usually swing more. Stocks have paid for their higher long-run returns with deeper falls.
Time horizon
The longer you can leave the money invested, the more time a bad year has to be made up.
Staying invested
Selling after a fall locks in the loss. Staying invested keeps the chance of a recovery.
The honest caveat
Volatility isn't the same as losing money, but holding on doesn't guarantee a recovery either. For a broad world fund, a fall is a loss on paper until you sell, and the world market has so far made up every fall, though sometimes only after many years. A single country's market can stay below its peak for decades, and a single company can fail and never come back.
But volatility matters a great deal if you need the money soon. After a 30% fall you need a 42.9% gain just to get back to where you started, and that can take years. Money for a home or another planned expense in the next few years is usually better kept out of stocks, however good their long-run record.
Swiss note
For a Swiss investor, foreign shares swing twice: once with their own price and once with the exchange rate. A world fund can rise in dollars and still fall in francs. A CHF-hedged share class removes most of the currency swing, at an ongoing cost, while Swiss shares and CHF bonds carry no currency swing at all.
Key takeaways
- —Volatility measures how far and how fast prices swing, in both directions.
- —Higher expected returns usually come with bigger swings: cash barely moves, bonds move a little, stocks a lot.
- —The longer you can stay invested, the less any single bad year matters.
- —A fall is a loss on paper until you sell, but holding doesn't guarantee a recovery. Money you need soon shouldn't be exposed to big swings.
Related concepts
Risk and Return
More risk buys the chance of a higher return, not the promise.
Time Horizon
When you'll need the money decides how much risk it can take.
Market Timing
Missing a few of the best days costs more than you'd expect.
Asset Allocation
Stocks, bonds and cash: the split that decides your ride.
Currency Risk for CHF Investors
Why a strong franc quietly eats into foreign returns — and when to hedge.