IN the world of finance, lots of people spend time being precise about what “risk” is.

After all, if they can pin something down to one number, it feels so much more controllable… and understandable. 

But actually, it’s more complicated than that.

Our friends at 7IM have put this into a helpful context to lessen what I believe can best be described as the “complicated complexity”.

Risk measures aren’t standardised like measures of volume, distance or weight.

If I ask ten people to pour a pint of lager – and other beverages are available - it’s easy enough…

You fill it to the brim and that’s a pint.

I’ll end up with ten identical pints.

But if I ask ten people to measure the risk of the FTSE 100, I could easily end up with ten completely different answers… as well as very few people to drink with.

Let’s look at one of the favourite measurements of risk - volatility.

The table below shows the volatility* of the FTSE 100, calculated in a few different ways.

Source: 7IM/Factset, as of 30/10/2023

The frequency with which you measure volatility has a material difference on the outcome, as does the time period you choose.

Over 5 years, measured daily, nearly 18% volatility.

But if you measured monthly over 10 years, it’s 12% - one-third lower!

Perhaps the weirdest thing is in the last column though.

Measure monthly, but from the middle of the month, and the FTSE looks a LOT more volatile compared to the end of the month.

Does that mean anything?

Well, it might.

If a bartender poured 10 different quantities when serving a pint, there’d be chaos - and they’d be breaking the law.

And the same is true for portfolios, if you don’t pay attention to the inputs - and make sure they’re consistent.

If I – or one of my colleagues at Future Life Wealth Management – can advise you with your portfolio, please don’t ever hesitate to get in touch with us by ringing 01246 435996.

*Volatility refers to the amount of uncertainty about the size of changes in the price of an asset, usually measured by standard deviation (which we use here for the FTSE 100).

A higher volatility means that values might move around a lot in either direction. A lower volatility means that a security's value tends to be more stable.