Ken Fisher's Debunkery – BUNK 19: BETA MEASURES RISK

Stocks are risky. Simple fact! But to get return, Ken Fisher explains, you must take risk - which many folks feel as volatility. (See Bunk 6.) Volatility is uncomfortable near term for most folks and quite unpredictable - and makes investing even harder than it might be otherwise. Makes many go mental - drives'em nuts, pure and simple Ken Fisher notes.

Because people are prone to like order, we like to measure. Take beta, for example - the academic concept, widely accepted throughout media and the investing culture, that claims to measure investment risk. Take it outside and leave it there. It's useless Ken Fisher believes. No - less than useless.

Folks (particularly academics who first foisted beta on us) like to think beta measures risk. No - it measures prior risk. Ken Fisher illustrates it measured risk - past tense! It doesn't measure anything about the present or future. Beta itself is a simple and accurate calculation. A stock's beta is a number representing its past volatility relative to the overall market's past, over a specific period. The higher a stock's past volatility, the higher its beta. If a stock moved perfectly in line with the overall market (usually in calculating beta, folks use the S&P 500 as the market index - but beta can be calculated against any market index), its beta is 1.0. Lower, and it was less volatile than the market; higher, and more so. Simple enough.

Read more on BUNK 19 in Ken Fisher's Debunkery.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.