Investing Demystified, 2nd Edition

Appendix C

The standard deviation

Table C.1 gives you an idea of how frequently you may lose a lot of money, depending on the risk you think equities will have. The higher the standard deviation the more frequently you will lose a lot of money.¹ A 20% annual standard deviation for equity returns may be a reasonable guess in future, but the standard deviation does vary a lot over time (see Figure 6.1 in Chapter 6). Table C.1 shows how much you would lose at standard deviations of between 1 and 3 (so increasingly unlikely and big losses), if the standard deviation of the markets was 15–35% and you assumed that the markets on average return 5%.

So while it is obvious that greater risk generally means more fluctuating outcomes, the standard ...