Volatility

Volatility is a measure of the intensity of price fluctuations in a financial instrument, such as a stock or an ETF, over a specific period of time. Statistically, it is typically calculated as the standard deviation of returns around a mean.

In practice, volatility is considered a key risk metric: high volatility means that the price swings sharply up and down. While this offers higher profit opportunities in the short term, it also carries a significant risk of loss. Investors distinguish between historical volatility, which is based on past values, and implied volatility, which reflects market expectations for the future.

While traders seek to actively exploit fluctuations for profit, long-term investors mitigate volatility through diversification and a long-term time horizon. This is because market turbulence is usually short-lived, so price fluctuations tend to even out over time.

Volatility is particularly pervasive in the context of stock investments and deserves the investor’s attention. In the blog «Drawdown: How Much Loss Can You Afford?», True Wealth CEO Felix Niederer explores this topic in greater detail.