Standard Deviation in Mutual Funds

A way to help you judge mutual funds is standard deviation. The definition is how far historic performance has been from the mean. It helps explain the range of annual total returns over a fund. As the range increases, so does the risk of price fluctuation. The lower the risk, the lower the return but it also has less loss to make up and may be more profitable in the long-term.

A standard deviation of 12 on a 10% return would mean that you could make 22% in one year or lose 2% in another. 22% and -2% are the range of gains and losses you are likely to get. Remember that a 50% loss would require a 100% gain just to break even. The style boxes that are best to consider for most people not wanting to spend hours each month doing investment research are the large cap value, large cap blend and mid cap value. Statistical differences between funds begin to show after 5 years. Don't be fooled by short-term performance hype.