When I evaluate a mutual fund for long-term investing, I don’t just look at returns. I pay equal attention to volatility—how much a fund’s returns swing from year to year. The most useful metric I use to understand this is standard deviation, especially over a 10-year period.
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What Is Standard Deviation in Mutual Funds?
Standard deviation measures the variability of a fund’s returns over time. A higher number means more fluctuation—both upward and downward. A lower number means returns are more stable.
In the context of mutual funds, 10-year standard deviation shows how much a fund’s annual returns have varied from the average annual return over the past decade.
Mathematically, it’s calculated as:
\sigma = \sqrt{\frac{1}{n - 1} \sum_{i=1}^{n} (R_i - \bar{R})^2}Where:
- \sigma = standard deviation
- n = number of years (in this case, 10)
- R_i = return in year i
- \bar{R} = average return over 10 years
Why I Pay Attention to 10-Year Standard Deviation
Over short periods, volatility can mislead. But over 10 years, patterns begin to stabilize. I use the 10-year standard deviation to:
- Gauge the fund’s risk profile
- Compare funds in the same category
- Balance my portfolio’s overall volatility
For example, if two funds offer 10% average annual returns, I’ll prefer the one with lower volatility—because it’s more predictable.
Interpreting Standard Deviation Values
Here’s how I generally interpret annualized standard deviation in mutual funds:
| Standard Deviation (Annual) | Interpretation |
|---|---|
| 2% – 5% | Low volatility (bonds, stable value) |
| 5% – 10% | Moderate volatility (balanced funds) |
| 10% – 15% | High volatility (stock funds) |
| 15%+ | Very high volatility (sector funds, small caps) |
Volatility is not inherently bad—but I want to be compensated for it through higher returns.
Table: 10-Year Standard Deviation of Selected U.S. Mutual Funds
| Fund Name | Ticker | Category | 10-Year Return | 10-Year Std Dev | Sharpe Ratio |
|---|---|---|---|---|---|
| Vanguard 500 Index Fund Admiral Shares | VFIAX | Large-Cap Blend | 10.9% | 15.3% | 0.66 |
| Fidelity Contrafund | FCNTX | Large-Cap Growth | 12.1% | 15.8% | 0.71 |
| T. Rowe Price New Horizons | PRNHX | Small-Cap Growth | 13.5% | 20.2% | 0.72 |
| Vanguard Total Bond Market Index | VBTLX | Intermediate Bonds | 1.5% | 3.8% | 0.10 |
| American Funds Growth Fund of America | AGTHX | Multi-Cap Growth | 11.0% | 15.6% | 0.68 |
| Vanguard Wellington Fund Admiral | VWENX | Balanced | 8.1% | 10.1% | 0.60 |
| PIMCO Income Fund | PONAX | Multi-Sector Bond | 4.2% | 5.6% | 0.50 |
| Vanguard Small-Cap Growth Index Admiral | VSGAX | Small-Cap Growth | 11.9% | 19.1% | 0.61 |
| Schwab U.S. Large-Cap Growth ETF | SCHG | Large-Cap Growth | 12.3% | 16.4% | 0.72 |
| Fidelity Low-Priced Stock Fund | FLPSX | Mid-Cap Value | 10.3% | 14.9% | 0.65 |
Example: Understanding What Std Dev Means in Dollars
Suppose I invest $10,000 in a fund with:
- Average annual return: 10%
- Standard deviation: 15%
One standard deviation means the fund could reasonably return:
10% \pm 15% = (-5%, 25%)That means:
- In a typical bad year, it might drop to $9,500
- In a typical good year, it might rise to $12,500
Over 10 years, compounding works in—but volatility drag can reduce actual gains.
How I Use This in Portfolio Design
To create a balanced portfolio, I don’t just aim for returns—I balance risk. For example:
- Core holdings: VFIAX or VWENX (10–15% standard deviation)
- Income stability: VBTLX or PONAX (4–6% standard deviation)
- Growth tilt: PRNHX or VSGAX (18–20% standard deviation)
I also calculate the portfolio standard deviation based on fund weightings and correlations. It’s not a simple average—it requires covariance:
\sigma_p = \sqrt{\sum w_i^2 \sigma_i^2 + \sum_{i \ne j} w_i w_j \sigma_i \sigma_j \rho_{ij}}Where:
- w_i = weight of asset i
- \sigma_i = standard deviation of asset i
- \rho_{ij} = correlation between assets i and j
This lets me reduce overall volatility through diversification.
Limitations of Standard Deviation
- Does not distinguish between upside and downside volatility
- Assumes returns are normally distributed
- Past volatility may not predict future risk
That’s why I also look at maximum drawdown and Sharpe ratio to assess whether the risk is worth the return.
Final Thoughts
I consider the 10-year standard deviation of a mutual fund as essential as its return. It tells me how bumpy the ride might be—and whether I have the risk tolerance to handle it.
If I want smoother performance with fewer surprises, I aim for lower standard deviation. But if I’m chasing higher returns, I make peace with more volatility—as long as it aligns with my investment horizon.
