It is a good idea to understand investing concepts like Beta so that you can have a more informed discussion with whomever you choose to receive investment/retirement planning advice from.
Not everyone is interested in learning the ins and outs of every aspect of investing — that’s why you have professionals handling those decisions.
However, it is a good idea to have a little knowledge of some concepts so that you can have a more informed discussion with whomever you choose to receive investment/retirement planning advice from.
Why learn about Beta?
Once you learn what Beta is, you’ll definitely want to learn about an investment platform that has a very low Beta but has generated returns that are 4.4% higher than what the S&P 500 has returned over the last 10 years.
What is Beta?
As it relates to investments and finance, the Beta of an investment is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to.
Most use the S&P 500 stock index as the “benchmark” to measure risk of other investments against so they have an idea of what to expect.
By definition, the benchmark itself has a beta of 1.0. Investments you compare to the benchmark are ranked according to how much they deviate (vary) from the benchmark.
Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market:
A beta of 1 indicates that the security's price will move with the market
A beta of less than 1 means that the security will be less volatile than the market
A beta of greater than 1 indicates that the security will be more volatile than the market
For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.
An asset has a Beta of zero if its moves are not correlated with the benchmark's moves. Beta can also be a negative number meaning that it generally moves opposite the benchmark.
Higher Beta investments tend to be more volatile and, therefore, riskier but provide the potential for higher returns. Lower Beta investments pose less risk but generally offer lower returns.
Some investments challenge this idea by offering a lower Beta with a track record of higher returns than the benchmark.
I found a fund family that has had less risk and higher returns than the market. For example, one low risk money-management platform has a beta of only .23 to the S&P 500, but it has averaged 4.4% more than the S&P 500 for the last 10 years.
The bottom line
If you have your money sitting in stocks or mutual funds you could be putting your assets at a higher or much higher risk than it needs to be in order to generate returns that are in excess of the market average.
Roccy DeFrancesco, JD, is author of The Doctor's Wealth Preservation Guide, and founder of The Wealth Preservation Institute. The DWPG has recently been approved for up to 21 AMA PRA Category 1 CME Credits™ in a self-study format. If you would like to purchase the book at a 33% discount as benefit for being a reader of Physician’s Money Digest so you can earn CME credits in the comfort of your home, or if you have any questions about this article, e-mail firstname.lastname@example.org. To read Roccy’s other books visit www.roccy.org.