- 1). Contact several low cost no-load mutual fund families and review the conservative stock funds, government bond funds and money market funds they offer. All of these categories are typically less volatile than more aggressive stock mutual funds.
- 2). Request a prospectus for each fund you are considering. Look in the prospectus for the beta coefficient. The beta coefficient is a measure of the volatility of a particular fund, with the stock market as a whole assigned a beta of one. So a fund with a 0.50 beta coefficient would be half as volatile as the overall stock market, while a fund with a 1.50 beta would be 50 percent more volatile.
- 3). Examine the returns of each fund over the past couple of years. While past performance is no guarantee of future performance, a mutual fund with consistent returns over a five or ten year period is likely to be less volatile going forward than a fund that is up sharply one year and down just as sharply the following year.
- 4). Consider using bond funds and money market mutual funds to reduce the overall volatility of your portfolio and enjoy more predictable returns. Government bonds are typically considered to be the safest type of bond investments, since the government owns the printing press. Money market funds are designed to keep a consistent one dollar share price, so their returns are very predictable. Keep in mind, however, that as the level of risk goes down, the yield does the same.
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