Portfolio Volatility, Explained

How mixing different investments changes the size of the swings.

Volatility is the size of an investment's typical ups and downs — not which direction it goes. Because different investments don't all move together, a mix usually swings less than its pieces suggest. That gap is the diversification benefit.

The interactive version lets you build a mix of stocks, bonds, commodities, alternatives, and cash, then shows the mix's assumed average year, its volatility, the diversification benefit, what a typical year looks like, the odds of a down year, and what the swings cost in compounded growth — with the correlation between each pair of asset classes in plain English, and, on a hypothetical portfolio value you enter, what one year of those swings looks like in dollars. The return figures are the same long-term planning assumptions behind the full platform: assumptions, not forecasts. Diversification does not ensure a profit or protect against loss.

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.

Read more: What does diversification actually do?. How the calculator works, with a worked example: the portfolio volatility calculator guide. Past performance is no guarantee of future results.

Why the order of returns matters once withdrawals start: what is sequence of returns risk?

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