BUSINESSWEEK ONLINE : JANUARY 17, 2000 ISSUE
BUSINESSWEEK INVESTOR How Much Volatility Can Cost You Even if you swear you will cling to your stocks through a ferocious bear market, it doesn't pay to ignore risk. For one thing, investors who match their risk tolerance to the risk in their portfolios have a better chance of sticking to their plans when things get ugly. Risk also has a big impact on what investors care most about--returns. Generally, as an investment's riskiness rises, so does the potential for a big payoff. But because high-octane securities are prone to blow-ups, it's foolish to assume that the road to riches is paved with Internet stock certificates. To see why, throw a dart at the 10 riskiest mutual funds ranked according to a common measure called standard deviation. You might find a winner, like the Internet Fund, which returned an average of 89.2% annually over the past three years. But you might also draw the Lexington Troika Russia Fund, which lost an average of 20.6% a year over the same period. Of course, when picking stocks and funds, most investors search for hot performers. This doesn't work either. But because an investment's risk level tends to remain constant over time, risk-adjusted returns have ''some predictive value,'' says Leah Modigliani, a Morgan Stanley Dean Witter U.S. investment strategist. In a study that ranked 660 stock mutual funds with 10-year track records according to risk-adjusted returns, Modigliani found that a statistically significant 39% of those in the top quartile during one five-year period landed there again in the next five years. Morningstar, BUSINESS WEEK, and S&P Personal Wealth also offer risk-adjusted rankings of thousands of mutual funds. BIG DIFFERENCE. The value of risk-adjusted returns is clear when you compare two investments, each earning an average of 10% a year. Because of compounding, $100,000 invested in a portfolio that rises a steady 10% each year will become $672,750 after 20 years. That same $100,000 is worth only $480,000 after two decades if it is invested in a more volatile fund that alternates between 30% annual increases and 10% annual declines, according to Bugen Stuart Korn & Cordaro, a Chatham (N.J.) money-management firm. Before gauging the riskiness of your investments, it's important to understand your tolerance for financial uncertainty. Time horizons play a big role, with those needing cash soon able to take fewer chances than those who don't. To assess a client's comfort with risk, Bugen Stuart demonstrates what would have happened to an investor who put everything in stocks in 1973 and 1974, when the Standard & Poor's 500-stock index lost about 40% of its value. If clients lack the nerve or cash to hang tough, the firm reduces its recommended commitment to stocks until hitting a comfort zone. ''The worst thing I can do is put you in a portfolio that is too volatile and have you bail out at the bottom,'' partner Christopher Cordaro says. Indeed, in 1975, the S&P 500 rose 37.2%. Whether big swings in stock prices thrill or scare you, keep in mind that when constructing a portfolio, risk is only one factor to consider. Another is how much your investments need to earn to meet your goals. If you're too conservative, you might unwittingly expose yourself to an even greater risk than that posed by the stock market--that of not having enough money to retire on. By ANNE TERGESEN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Dealing with Risk TABLE: Risk Terms Is Your Comfort Level Too High? CHART: The Bull-Market Generation CHART: Margin Debt Is Soaring How Much Volatility Can Cost You The Nitty-Gritty: How to Do the Math TABLE: Where to Find Risk Measures for Funds TABLE: Returns and Risk for 1999's Top 10 Mutual Funds INTERACT E-Mail to Business Week Online

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