- quote -

I don't think volatility of stocks and volatility of a portfolio are
measuring the same thing.

When looking at an individual asset class, (like stocks) or an asset
(like a small cap stock fund), volatility would be measured as
"standard deviation of returns". This is how risk is measured in many
cases.

When looking at a portfolio which mixes stocks and bonds and cash and
Real Estate (and any other assets), volatility would probably be
measured as "deviation of principal balance in the overall portfolio".

Diversification "reduces volatility"- holding large cap stocks and
small cap stocks would be "less volatile" than just owning one of the
two. But in same breath this diversification also hurt returns in
short term (as one of these classes at any moment in time will probably
be outperforming the other).

"Elle" <honda.lioness[at]nospam.earthlink.net> wrote
- quote -

Or the point denotes tunnel vision on my part. As
BreadwithSpam hinted a while back, of course bond returns
being at least somewhat uncorrelated with stock returns
would, when the two are combined, tend to produce lower
volatility than either possess individually. Throw in that
stocks' volatility (as measured by standard deviation) drops
like a rock as the holding term increases, while bonds'
volatility drops very little, and the result is they are
roughly an equally safe bet (as far as volatility is
concerned) for the long term. Whence all other things being
equal, the higher average historical returns of stocks argue
for long-term investors emphasizing stocks. Factor in how
inflation ravages bond returns in the long term, and the
clear winner for the long term is stocks.