A Volatility Snapshot

Damon Bi, Analyst

What does volatility mean to an investor portfolio?

Volatility measures the magnitude of swings in asset returns.

Volatility typically retains the characteristic of going up when asset performance is down, especially during periods of market stress. This makes it a perfect gauge for investor sentiment.

Just as human emotions linger through time before returning to a normalised state, volatility has a tendency to persist before reverting to a historical mean. This makes volatility more predictable than asset return.

Beyond serving as a sentiment indicator, modern finance literature pronounces volatility as being a synonym of risk for its effect on long-term wealth building. Given a portfolio with a certain level of expected return, high volatility often puts a drag on accumulated return through a compounding effect, and leads to lower final wealth.

This premise is also empirically proven by studies in most developed markets including Australia. Therefore, it is in any long-term investor’s interest to effectively manage the volatility of their portfolio.

 

Please find full discussion below.

A Volatility Snapshot