A Mutual Fund's Volatilityby SEC
Before buying a mutual fund, think about its volatility. While past performance does not necessarily predict future returns, it can tell you how volatile a fund has been. Generally, the more volatile a fund, the higher the investment risk. If you'll need your money to meet a financial goal in one year, you probably can't afford the risk of investing in a fund with a volatile history because you will not have enough time to ride out any declines in the stock market. Read the fund's prospectus and annual report, and compare its year-to-year performance figures. These figures can help tell you whether the fund earned most of its returns in a few small bursts or whether its returns came in a steadier stream. For example, over ten years, two funds may have gained 12% per year on average, but they may have taken drastically different routes to get there. One might have had a few years of spectacular performance and a few years of low (or negative) returns, while the performance of the other may have been much steadier from year to year.