Volatility is a statistical measure of the dispersion around a security’s mean price. In most cases, the higher the volatility, the riskier the security. Volatility is often measured from either the standard deviation or variance between returns from that same security or market index and commonly referred to as Beta.

Beta is an indicator that tells you how volatile a stock has been compared with the S&P 500. For example, a beta of 1.25 indicates that the stock’s movements have been 25% greater, on average, than those of the index.

Volatility can emotionally drain an investor who is supposed to be focused on wealth growth and preservation. You can have an alpha-seeking strategy that outperforms in terms of raw returns but if most people would sell out after a 70% plunge over the course of two years, how realistic is it? There’s a saying that slow and steady wins the race and although we feel this strategy is not “slow”, keeping its beta low helps keep it steady.

Emotions aside, large up- and down-swings can work against you. If you held an investment that went up 10%, then down 10% the next day, then again up 10% then down 10%, and up/down one more time, you would be down 3% overall. Your arithmetic daily average return would be zero (the three 10% green days cancel out the three 10% days to the down side); however, 10% on the way down mathematically hurts your portfolio more than the benefits of 10% up. Lowering your beta/volatility can help counter this.