Volatility

Volatility in the context of your investments refers to the variability or fluctuation of returns. Imagine you're buying a basket of fruits every week from the local market. One week, the price of tomatoes might be stable, but the next week, it skyrockets due to a supply shortage. Similarly, the prices of your investments can rise and fall unpredictably. In Nigeria, the stock market, represented by the Nigerian Exchange (NGX), experiences these fluctuations daily. If you've invested in a company listed on the NGX, the value of your shares can change rapidly based on various factors, including economic news, company performance, and even global events.

Standard deviation is a statistical measure that quantifies the extent of these fluctuations. To put it simply, it tells you how much the returns on your investment deviate from the average return. For example, if you're earning an average of ₦1,000 monthly from a particular stock, but sometimes you get ₦800 and other times ₦1,200, that's volatility. When the Central Bank of Nigeria (CBN) adjusts the Monetary Policy Rate (MPR), which is currently around 27.50%, it can cause ripples across the financial market. This adjustment might affect the interest rates on Treasury bills, which are short-term debt securities issued by the government, and in turn, influence the stock prices and investment returns.

In Nigeria, there are also specific taxes that impact your investment returns, such as the 10% Withholding Tax (WHT) on dividends and the 10% Capital Gains Tax (CGT). These taxes can further alter the net returns you receive, adding another layer of complexity to understanding the true volatility of your investments. For instance, if you earn a dividend of ₦10,000 from a stock, the WHT will deduct ₦1,000, leaving you with ₦9,000. Similarly, if you sell an asset at a profit of ₦50,000, the CGT will take another ₦5,000, reducing your net gain to ₦45,000.

Understanding the volatility of your investments is crucial for making informed decisions. For example, if you're a retiree relying on consistent returns from your investments, you might prefer less volatile options like Treasury bills, which are generally more stable. On the other hand, if you're younger and have a higher risk tolerance, you might be comfortable with more volatile investments like stocks, hoping for higher returns despite the ups and downs.

Why it matters: Knowing the volatility of your investments helps you gauge the risk involved and decide whether your investment aligns with your financial goals and risk appetite. By understanding how much your returns can fluctuate, you can better prepare for potential market changes and make strategic decisions to safeguard and grow your wealth.