Vanguard Explorer

Diversification is the main idea behind mutual funds. Smart investors should hold man types of assets, which includes stocks, bonds and cash. Diversification can lower risk because when some assets are up in value, others are usually down in value. The spreading of trading costs over a larger investment in-turns brings the percentage of transactions cost down in a mutual fund. Additionally, each investor does not have to worry about doing research which further saves expenses. Mutual funds also keep track of when people buy and sell. This makes tax reporting easier and lowers record keeping costs. Before buying a mutual fund, one should consider the following five key questions. First, how has it performed? Second, how risky has it been? Third, what does it own? Fourth, who runs it? Lastly, what does it cost?

Vanguard Explorer is a small growth fund that produces above average returns and has little volatility compared to its peers. The performance… If I had the money to invest I would probably go for the more risky stock funds that have the ability to produce higher returns. I am young and have the opportunity to fail and then get back in the game.

Studies have shown that past risk is a good indicator of future risk. Standard deviation is the most used to measure a funds risk. It is good to use because it provides a precise measure of how varied a funds returns have been over a particular time frame. The standard deviation will be greater the more a funds return fluctuates from month to month. Vanguard Explorer standard deviation is 15.94, which is around the average of other small growth funds. So, it seems to have consistent returns compared with its peers. Beta, on the hand is a relative risk measurement because it is the funds volatility against a benchmark. The higher the beta the more volatile it is. When the beta is greater than 1.0, the fund is more volatile than the benchmark and when it is less than 1.0, the fund is less volatile than the index. Explorer’s beta is .88, which indicates that it is less volatile than the index. Measuring r-squared is less relevant and reliable than beta when measuring the funds volatility. A funds r-squared against the index has to be 75 or higher, or else disregard beta. Fortunately, for the Explorer fund the r-squared is 98 and we can use the beta data to conclude that it is not too volatile. The bear market ranking is another way to determine risk. This depicts the performance of the fund only during the bear market. Morningstar determined that funds with a score of one or two withstood bear markets better than a ranking of 9 or 10. Explorer’s bear market ranking is an eight, which indicates that it does not do to well when the market is in a bear market. A funds alpha is the difference between the expected return based o its beta and its actual returns, or also the value a portfolio manager adds. The higher the alpha the better because it means that the fund is delivering returns higher than they should be, given the amount of risk they assume. Explorer’s alpha is 1.94 compared to its peers of 2.50. They might be trailing there peers a little bit, but Explorer is still producing good numbers. When it comes to the Sharpe ratio, Explorer has the same numbers with its peers, which means they are average when it comes to the returns and the amount of investment risk it has taken. Overall, I see this as a neutral or not too risky fund compared to its investment risk. Morningstar gives Vanguard Explorer a below average risk. The thing that helps Explorer is that is little bit less volatile than some of its peers.

Vanguard Explorer’s