Jargon buster: volatility

According to Roger Birt, head of Guaranteed Investment Portfolios at Old Mutual Corporate, “volatility” refers to the measure of uncertainly or risk attached to the size of fluctuations in the value of an investment. In other words, by how much the investment increases or decreases over a short period of time.

In South Africa, the South African Volatility Index (SAVI) measures how much volatility exists in the local stock market. A high volatility rating means higher risk. High volatility suggests a “fearful” market. For example, in the 2008/09 market collapse, the SAVI recorded its highest level ever.

Volatility increases as a result of more trades being undertaken on the market. This is as a result of investors being uncertain about the prospects from the market.

Long-term investors, such as retirement fund members, experience more erratic behaviour in the returns earned on the JSE during periods when the SAVI is high. They therefore experience heightened volatility (increases and decreases) in their savings levels.

In “volatile” markets, you need to know your risk profile, particularly if you are older or closer to retirement — if you invest too aggressively you might lose a significant portion of your retirement savings if the markets dip. And those losses are not easily recovered late in life.

Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information

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