October's investing tip from Morningstar.com

If You Don't Like Volatility, Read This

When the financial press and investors talk about roller coaster stock markets, the kind that make you queasy, they're talking about this year.

Not everyone is a fan of roller coasters. If you are looking for lower-risk fund choices, Morningstar Library Edition can help. Just look for the standard deviation number you'll find in our fund reports under Risk Measures.

Morningstar analysts like standard deviation because it tells investors just how much a fund's returns have fluctuated during a particular time period. We calculate standard deviations every month, based on a fund's monthly returns for the preceding three-, five-, and 10-year periods.

In and of itself, a fund's standard deviation doesn't mean much. It is significant only when compared with the standard deviations of other funds. For example, for whatever reason, an investor is torn between Vanguard Mid Capitalization Index VIMSX and JP Morgan Mid Cap Equity Select VSNGX. When you compare their standard deviations, you'll see that the standard deviation of the JP Morgan fund is just 8.75, much lower than Vanguard's 10.42. (Please note that the numbers in the database may be slightly different due to monthly recalculations.)

Here's another example. Let's say you would like to find the domestic-stock funds with the highest three-year returns and the lowest volatility. Go to the Morningstar Library Edition Fund Screener and search for all domestic-stock funds with three-year standard deviations less than their category averages also producing three-year returns greater than their category averages. As you can see, there are around 1,900 funds meeting your criteria out of a universe of nearly 11,000.

Of course, investors should base purchase decisions on more than just standard deviation. But for the risk-averse it's a good number to know--especially in a market like this year's.

Morningstar.com is great tool for new and veteran investors. It's chock full of unbiased analyst reports, tools for evaluating your portfolio, and lessons on how to invest. The best part is that it's free to all valid library cardholders! Begin now or learn more.