What is standard deviation in investment?

Definition and Examples of Standard Deviation in Investing

The standard deviation in investing is a measure of the volatility of investment returns. The larger the standard deviation, the greater the fluctuations in returns. Conversely, an investment with a small standard deviation is characterized by more stable returns.

How Standard Deviation Works in Investing

Standard deviation in investing works by measuring how much returns deviate from the average. If the standard deviation equals zero, the investment will provide the same returns without change from year to year. However, in reality, there is often a range of returns, so standard deviation provides a measure of the existing volatility.

What Standard Deviation in Investing Means for Individuals

Understanding standard deviation can help investors make investment decisions that align with their risk tolerance and overall financial circumstances. Some investors may not be comfortable investing in assets with high volatility, even if the potential returns are greater. For example, retirees may prefer more stable returns to fund their retirement lifestyle, rather than chasing periods when assets return below average.

Some investors may be comfortable accepting more volatility if it means higher long-term returns. However, it may be preferable to know what to expect in terms of standard deviations rather than being surprised by fluctuations in returns.

However, it should be noted that standard deviation may not be the only measure of risk, nor is it necessarily a direct substitute for risk. You may be able to find this measure from some financial services companies that publish their standard deviation figures. In other cases, determining standard deviations yourself may involve complex mathematics, so you might want to work with a professional if you wish to calculate these numbers.

Source: https://www.thebalancemoney.com/what-is-standard-deviation-in-investing-5225205