Portfolio Volatility Calculator

A portfolio volatility calculator shows how much a mix of investments swings from year to year, and why a mix usually swings less than its pieces suggest. Ours works on five broad kinds of investments under stated long-term assumptions. It is an illustration, not a forecast, and it never looks at any particular fund or account.

Open the portfolio volatility calculator

What it does

Volatility is the size of an investment's typical ups and downs, not which direction it goes. The calculator takes a mix of stocks, bonds, commodities, alternatives, and cash and shows the mix's assumed average year, how big its swings are, the range a typical year lands in, how often a year ends down in this model, and what the swings cost in compounded growth. Because different investments don't all move together, the mix's swings are usually smaller than the weighted average of its pieces. That gap is the diversification benefit.

How to use ours

1. Build a mix with the five sliders, or start from an example. The mix needs to total 100%. The examples are illustrations, not recommendations.
2. Read the results: the assumed average year, the size of the swings, a typical year's range, the odds of a down year in this model, and what the mix compounds to.
3. Optionally enter a hypothetical portfolio value to see one year of those swings in dollars. Any amount, real or made up. Nothing you enter is stored.

The assumptions

Every figure is arithmetic over five rows: an assumed average year and a volatility for each kind of investment, plus how each pair moves together. They are the same long-term planning assumptions behind the full planning platform: assumptions, not forecasts, before inflation, fees, and taxes.

A worked example

The calculator opens on a mix of 60% stocks and 40% bonds. Under the assumptions above:

• The assumed average year is 6.25%, the weighted average of the two pieces. Mixing never changes the average.
• If the pieces' swings simply added up, the mix would swing about ±11.8%. Because stocks and bonds don't move in lockstep, it swings about ±10.6% (moderate swings). The 1.2-point difference is the diversification benefit.
• In roughly 2 of every 3 years, results land between −4.4% and +16.9%, and in roughly 19 of 20, between −15.0% and +27.5%.
• About 29% of years end down in this model.
• Over long stretches the mix grows at about 5.7% a year, not 6.3%. The 0.6-point gap is the cost of the swings: a −20% year followed by +20% does not get back to even.

Side by side with all stocks, under the same assumptions:

All stocks has the higher assumed average year, and also bigger swings, more down years, and a bigger gap between its average and what it compounds to (1.3 points against 0.6). Neither is better in the abstract. The calculator shows these same figures for these mixes, computed by the same code.

What it leaves out

• Correlations change. The figures here are long-run averages. In any given year, how two kinds of investments move together can be quite different.
• In a crisis, many investments can fall together. In sharp sell-offs, the pieces of a portfolio have often moved together more than usual, just when the cushion was wanted most, so the diversification benefit shown here can shrink.
• Bigger moves happen. The typical-year ranges assume a smooth, bell-shaped spread of results. Real markets have bigger moves more often than that.
• Fees and taxes. Every figure is before fees and taxes, and both lower what an investor keeps.
• Asset classes, not funds. Each row is a broad category. A real fund holds particular investments, charges its own fees, and can swing more or less than its category.
• Not advice. The example mixes are illustrations, not recommendations of any mix. The right mix depends on goals, timeline, and when the money is needed.

Related

• What does diversification actually do? An explainer on multi-cycle.com.
• Related: 4 percent rule calculator guide · What is sequence of returns risk?
• Multi-Cycle Planning: all of the free tools.