Investor Corner/The asset classes/Equity Concepts
2.1.7 Standard Deviation
Standard deviation is a statistical measure of how spread out returns have been around their average. A higher figure means a wider range of outcomes in any given period, and therefore a bumpier ride.
Spread around an average
If a fund has averaged 12% a year with a standard deviation of 15%, that means individual yearly returns have typically ranged well above and below that 12% average, sometimes by a wide margin. A fund with the same 12% average but a standard deviation of only 6% has historically delivered a much steadier, more predictable path to the same long-run number.
Why two funds with equal returns can feel very different
Standard deviation is the reason two funds can post identical returns over ten years while feeling completely different to hold. The fund with the higher standard deviation likely had sharper falls along the way, testing the investor's patience far more, even though the destination looked the same on paper at the end.
Using it sensibly
Standard deviation is most useful when comparing funds within the same category, where it can highlight which one has historically taken a rougher path to a similar destination. It says nothing about the direction of future returns, only about how widely past returns have varied, so it should sit alongside other measures rather than being used alone.
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