I’m sure you’ve heard, “Yes
that investment is risky.” Yes all investments are risky. However, don’t settle for that statement without
digging into a few key indicators that show the true risk. Do your A’s and B’s of risk, the Alpha and
Beta. By looking at a funds’ Alpha and
Beta you will be doing yourself a great favor and help yourself understand the
risks of any investment.
The ALPHA shows how
well a fund performs in a risk environment.
Using a baseline of 0, anything above 0 shows that the fund performed
better than expected. Conversely, negative
number indicates that the fund did not meet expectations. For example, if a fund was expected to return
5% but only yielded 3%, its Alpha would be -2.
The important takeaway is
NOT to say, “Well my fund got me 3% so that’s not too bad
and at least I did not lose any money.” It’s far better to put it in the
context of how well it should have performed with its’ peers.
Next look for the BETA.
This measures the volatility of an
investment. If your investment has a
Beta of 1.0 this means it will perform according to what the market does. Anything higher than a 1.0 means much more
volatility. Let’s say you find a Beta of
.8. This is good in that it shows less
severe price swings.
In summary you want to find
an investment that has a HIGH ALPHA, possibly as high as 15 or 20 and a BETA
BELOW 1.0. Our team would be happy to
provide you with a free risk analysis. I hope this helps because there are tons
of opportunities in the investment world.