Warning: Do You Know Your Mutual Fund’s Beta?

Wall Street Two Signs

The volatility you see in the stock market is historic. On a percentage basis, investors are seeing huge daily swings in the price of stocks and stock indexes. Watching is volatility can be unnerving. If you know one important statistic, however, you can assess the volatility of your mutual fund investments.

Click Here For Free Report: 10 Great Resources For Personal Finance

The recent decline

The Standard and Poor’s (S and P) 500 is an index of 500 of the largest stocks that trade on exchanges. If you want to assess the recent performance of the overall stock market, the S&P 500 is a good place to start.

The S&P 500 index has declined about 10% since early May. Not the end of the world, but a meaningful decline. The problem isn’t necessarily the percentage decline over time- it’s the roller coaster ride along the way. This roller coaster effect is what really gets to investors.

Click here for free chapters from my personal finance ebook: How To Save, Invest and Manage Debt.

How much volatility going forward? 

The VIX is the ticket (stock) symbol for the CBOE Volatility Index. The index was created by the Chicago Board Options Exchange, or CBOE. All of the S&P Stocks have options that trade on each stock. An option gives you the right to buy or sell the stock at a specific price. Options allow you to speculate on the price change in a particular stock.

Just as stock prices change, the price on stock options change. Keep in mind that an option’s price is based partly on the market’s expectation of the volatility in the stock. If a stock is expected to be volatile, the option is more likely to generate a profit. Option traders need volatility to profit- either a stock price increase or decrease.

The VIX is a measure of expected market risk in the future- an “investor fear gauge”. From mid-August to mid- September of ’15, the VIX’s value has fluctuated widely.

So, let’s agree that there’s been a lot of volatility in the markets lately. What does it mean to you and the mutual funds you own?

Defining Beta

An important measure of volatility for an investment- including mutual funds- is Beta. For an individual stock, beta is a measure of the stock volatility in relation to the market. Here are some examples:

  • If your IBM stock price moves more than the overall market (up or down), the stock has a beta of more than 1. If, for example, the S&P 500 increases 10%, your stock price might increases 14%. The same is true on the downside.
  • If you Microsoft stock price moves less of the overall market, it has a beta of less than 1. If, for example, the S&P 500 increases 10%, your stock price may increase 7%.
  • If you Google stock moves right along with the overall market, the beta of your stock is 1.

You can use this knowledge when you select investments. It’s all about higher risk, higher potential reward. If you’re not comfortable with a lot of risk and volatility, you would look for stocks (or mutual funds) with a beta of less than 1. Sky drivers and people who ride motorcycles without helmets would want a beta of more than 1.

Finding beta for your mutual fund

The easiest way to find out the beta for your mutual fund is to Google the fund and click on their website. I did this for Washington Mutual Investor’s fund. This is a fund that invests in large stocks- all company names you would know.

I clicked on the “Ratings and Risk” drop down menu. Washington Mutual has a beta of .9. So, if the overall markets move up or down 10%, this fund moves 9%.

Low beta funds: Examples

So, you may ask yourself: What is a good example of a low beta mutual fund? This article lists several funds with low betas. One is a portfolio of utility stocks. That makes sense: The earnings of utility companies are steady and predictable. Utility stock prices don’t have as much volatility.

Another fund listed invests in real estate investment trusts (REITS). Given the real estate focus, not as much beta. REITS buy and manage property- less of a connection with the equity markets.

Use your knowledge of beta to select mutual funds with volatility that you can live with. Checking the beta on your fund can give you some peace of mind.

Have you looked at beta? I’d love to hear from you.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

Co-Founder: accountinged.com

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

(you tube channel) kenboydstl


Wall Street Two Signs

Terrapin Flyer, Wall Street (CC BY-SA 2.0)

(Visited 90 times, 1 visits today)

71 thoughts on “Warning: Do You Know Your Mutual Fund’s Beta?”

  1. Can I just say what a comfort to uncover
    someone that actually understands what they’re talking
    about on the internet. You definitely realize how to bring an issue to light and
    make it important. More and more people ought to read this
    and understand this side of your story. It’s
    surprising you’re not more popular because you most certainly have the gift.

  2. It’s a pity you don’t have a donate button! I’d certainly donate to this excellent
    blog! I suppose for now i’ll settle for book-marking and adding your RSS feed to my Google account.
    I look forward to new updates and will share this blog with my Facebook group.

    Talk soon!

  3. I was recommended this blog by way of my cousin. I am no longer positive whether or not this submit is written through him as
    no one else realize such distinct about my difficulty.
    You’re wonderful! Thanks!

  4. These articles might be distributed to most people, a certain person, a
    circle, or even a band of circles. The idea of organizing groups as circles is incredibly thoughtful.

    The general concise explaination ‘huddle’ is always
    to come closer or gather together.

  5. Have you ever thought about adding a little bit more than just
    your articles? I mean, what you say is important and everything.
    However think about if you added some great photos or video clips to give your
    posts more, “pop”! Your content is excellent but with pics
    and clips, this blog could undeniably be one of the best in its niche.
    Terrific blog!

  6. I just want to mention I am new to blogging and site-building and actually enjoyed you’re web-site. More than likely I’m going to bookmark your site . You amazingly have wonderful posts. Thank you for sharing with us your web-site.

  7. I haven¦t checked in here for some time because I thought it was getting boring, but the last few posts are good quality so I guess I will add you back to my daily bloglist. You deserve it my friend 🙂

  8. Write more, thats all I have to say. Literally,
    it seems as though you relied on the video to make your point.
    You clearly know what youre talking about, why throw
    away your intelligence on just posting videos to your weblog
    when you could be giving us something enlightening to read?

  9. Hello there, I discovered your web site by the use of Google even as looking for a related matter, your website came up, it appears to be like great.

    I’ve bookmarked it in my google bookmarks.
    Hello there, simply was aware of your blog via
    Google, and found that it’s really informative. I am gonna watch out for brussels.
    I’ll be grateful in the event you continue this in future.

    A lot of other folks shall be benefited out of your writing.

  10. Please let me know if you’re looking for a author for your site.
    You have some really good posts and I think I would be a good asset.
    If you ever want to take some of the load off, I’d absolutely love
    to write some content for your blog in exchange for
    a link back to mine. Please shoot me an email if interested.

  11. Hello there! I know this is kind of off topic but I was
    wondering which blog platform are you using for this
    website? I’m getting sick and tired of WordPress because I’ve had problems with
    hackers and I’m looking at alternatives for another platform.

    I would be great if you could point me in the direction of a good platform.

  12. I’m impressed, I must say. Actually rarely do I encounter a weblog that’s both educative and entertaining, and let me tell you, you may have hit the nail on the head. Your idea is outstanding; the problem is something that not sufficient persons are speaking intelligently about. I’m very happy that I stumbled across this in my seek for something relating to this.

  13. There are some attention-grabbing deadlines on this article however I don’t know if I see all of them heart to heart. There may be some validity however I will take maintain opinion till I look into it further. Good article , thanks and we would like more! Added to FeedBurner as properly

  14. Howdy! I could have sworn I’ve been to this web site before but after going through a few of the articles I realized it’s new to me.
    Anyhow, I’m certainly delighted I came across it and I’ll be book-marking it
    and checking back frequently!

  15. When I initially commented I appear to have clicked on the -Notify me when new comments are added- checkbox and from
    now on each time a comment is added I recieve 4 emails with the same comment.
    Is there an easy method you can remove me from that service?

  16. Good day! This is my first visit to your blog! We are a
    collection of volunteers and starting a new project in a community in the
    same niche. Your blog provided us valuable information to
    work on. You have done a marvellous job!

  17. Right here is the perfect blog for anybody who really wants
    to understand this topic. You understand so much its almost hard to argue with you (not that I really will need to…HaHa).
    You certainly put a brand new spin on a topic which
    has been discussed for years. Great stuff, just wonderful!

  18. I think this is among the most important info for me.
    And i am glad reading your article. But should remark on some general things,
    The web site style is perfect, the articles is really great : D.
    Good job, cheers

  19. Howdy! This blog post couldn’t be written any better! Looking
    at this article reminds me of my previous roommate!
    He always kept preaching about this. I am going to forward this information to him.

    Pretty sure he’s going to have a great read. Thank you for sharing!

  20. Excellent goods from you, man. I’ve understand your stuff previous to and you are just too great.
    I really like what you have acquired here, really like what you
    are stating and the way in which you say it. You make it enjoyable
    and you still take care of to keep it smart. I can not wait to
    read far more from you. This is really a tremendous website.

  21. Do you mind if I quote a couple of your posts as long as I provide credit and
    sources back to your blog? My website is in the very
    same niche as yours and my visitors would truly benefit from
    a lot of the information you present here. Please let
    me know if this ok with you. Many thanks!

  22. Fantastic beat ! I wish to apprentice at the same time
    as you amend your site, how can i subscribe for a weblog site?
    The account aided me a acceptable deal. I were tiny bit acquainted of this your broadcast offered vivid clear concept

  23. hello there and thank you for your info – I have definitely picked up
    anything new from right here. I did however expertise a few technical points using this web site, since
    I experienced to reload the website lots of times previous
    to I could get it to load correctly. I had been wondering
    if your hosting is OK? Not that I’m complaining, but slow loading instances times will very frequently affect your placement in google and could damage your
    high quality score if ads and marketing with Adwords. Well
    I’m adding this RSS to my e-mail and can look out for a lot more of your respective interesting content.
    Ensure that you update this again very soon.

  24. I am really inspired with your writing abilities as neatly as with the structure to your weblog.
    Is that this a paid theme or did you modify it your self?
    Anyway keep up the nice quality writing, it is uncommon to peer a great
    blog like this one these days..

  25. You might be wonderful! Thanks!Good blog here! Also your site loads
    up fast! What web host are you utilizing? Can I get your affiliate link to your host?
    I wish my website loaded up as swiftly as yours lol

Leave a Reply

Your email address will not be published. Required fields are marked *