Ask Julie

Fearsome Investments

Dear Julie, I have never invested my money because I’m afraid of losing it. I feel paralyzed by fear even though my intellect tells me that I should do something else with my guaranteed accounts. Can you help?

Fear plays a major role in
investing. Most investors fear the risk of losing their initial investment due to the volatility of the market. But volatility needs to be understood rather than feared, and once you understand how to measure risk, you can use it as a tool in evaluating your investment options so that you stay within your comfort zone.
We all have a different tolerance for risk. What may be completely acceptable to you may feel uncomfortable to me and keep me from getting the rest I need. But how do we measure the level of risk in an investment? We do that by looking at its Beta.
If that sounds like Greek to you, it’s because it is. Beta is the second letter in the Greek alphabet. But in investing, Beta is a statistical measure of a stock’s past price swings when compared with the price change of the general market, usually measured by the Standard & Poor’s 500 index.
The Beta of the S&P 500 Index has a rating of 1. That is your benchmark.
Now, let’s say that you are considering an investment with a Beta of 2; what does that imply? Well, though past returns do not guarantee future results, a Beta of 2 means that, in the past three years, that investment’s volatility has doubled the volatility of the S&P 500 Index. So, if the Index went up by 5 percent, your investment would have gone up by twice as much, or 10 percent.
But before you start jumping up and down with joy, wondering how to transfer your whole lifetime savings into that account, let me warn you that a Beta of 2 also implies that you are looking at the possibility of double the loss during the past three years. Yep! That’s right! When the market went down by 5 percent in the past three years, that investment probably sank by a whopping 10 percent. Can you stomach that? Only you can answer that question.
To sum it up: The higher the Beta, the higher the risk as well as the promise of rewards.
I am not saying that higher-Beta investments are only for gamblers and that you should aim for a Beta of less than 1. Higher-Beta stocks may possibly get you higher returns. But if you are faced with two good candidates, the lower-Beta stock will let you sleep better at night. If you decide to own a high-Beta stock or mutual fund, for example, keep a close eye on it and get ready to sell quickly—since the tide could turn sharply and suddenly.
Don’t be too quick to buy a stock with a Beta of 2 and higher. Studies have found that less than 5 percent of the best stocks carried this level of volatility. Therefore, don’t take any more risk than you can comfortably tolerate. Research has shown that the best stocks have had an average Beta of 1.14.
You can find the Beta ratings for all mutual funds by reading their report in www.Morningstar.com. Stocks publish their Beta as part of their quarterly reports, available from most financial Internet sites as well as in Value Line reports available in most public libraries. You will see the word “Beta” and the rating right next to it.
Investing is like walking a tight rope between greed and fear, and a successful investor is not necessarily one that achieves the highest returns, but that instead finds his/her balance between these two emotions. By learning about Beta and other practical investment tools found in my books and DVDs, you will loose your fear of investing and can settle in for a good night’s sleep.

Listen to Julie Stav’s
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information visit
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