Consistent Performance

You should favor funds with consistent performance over highly volatile funds. A mutual fund which is highly volatile could be very high when you need to sell. The downside is that it could also be very low. A fund which has high amounts of volatility is somewhat unpredictable. During upward markets it may be among your strongest performers, but it may be among your biggest losers in downturns. A highly volatile fund may provide little benefit for you by the time you desire to cash out.

Fortunately, there are two primary indicators of volatility. These measures are a fund’s Beta and Standard Deviation. Beta measures movement as compared to the market. A beta of 1 will move exactly with the market in the same direction. A beta greater than 1 will exceed the market’s movement in the same direction. A beta of 3 would move three times as much as the market in the same direction. A beta less than 1 will move less than the market in the same direction. A beta of 0.50 would move half as much as the market in the same direction. A beta that is negative will move in the direction opposite to the market. A higher number beta, either negative or positive, results in higher volatility in relation to the market of comparison.

The fund’s standard deviation is the volatility relative to its own historical performance. If the fund is an index fund attempting to perfectly replicate a criterion’s performance, standard deviation is relative to the index. A higher number results in more deviations from average and indicates higher levels of volatility. A lower score results in fewer deviations from standard performance. This indicates lower levels of volatility.