Funds With the Best Returns Relative to Risk

While higher "risks" -- as measured by standard deviations -- tended to produce greater rewards, there isn't always a direct correlation between the two. The interim "peaks" in the above chart show points along the standard deviation spectrum indicating outsized returns relative to the decile's standard deviation sequence.

The biggest "peaks" in returns relative to the "risk" sequence can be found in the third and seventh deciles.

The group of funds making up the third decile returned, on average, 1.35 percentage points per year more than the average fund in the first decile, yet the lower bound of the third decile range was close to 2.0 percentage points of total return performance above that of the first decile. In addition, the average three-year annual return for the third decile was higher than that of the "riskier" fourth decile.

Had we known three years ago what we know now, picking a fund in the seventh decile would have been a no-brainer. In late 2004, the logical forecast would have been that the tenth decil should have produced the highest average return of the groupings. Yet it turned out that the somewhat less volatile funds in the seventh decile produced that highest average return of the 10 groups.

If the third and seventh standard deviation deciles continue to be the "sweet spots" in the risk-return spectrum, the funds on the accompanying table should be of interest. They represent funds with TheStreet.com Ratings "'buy' recommendations" from the Sept. 2007 third and seventh standard deviation deciles.

All the current standard deviations of the funds in the table are lower than the corresponding data from three years ago, meaning volatility has dropped for each of the funds.

The funds in the less volatile third decile have produced respectable returns in the 18%-24% range for the latest 12 months and in the 12%-19% range annually for three years. But the more volatile seventh decile contains funds that have produced returns in the 26%-47% bracket over the past year and 18%-27% annually for three years.

The choice of the investor is whether to risk more uncertainty -- meaning volatility -- in order to possibly achieve higher returns. That is what investing has always been about, and will continue to be about.

Stock Funds Still Less Volatile Than in 2004 FUND VOLATILITY: IGNORE AT YOUR OWN RISK
NAME, TICKER & TheStreet.com RATINGS GRADE	12-MO. TOTAL RET'N (%)	3-YR. ANN'L RET'N (%)	CURRENT 3-YR. STD. DEV'N (%)	SEPT. '04 3-YR. STD. DEV'N (%)	MINIMUM INITIAL INVESTM'T
SELECTED LOW-TO-MODERATE-VOLATILITY
BlackRock Eq Dividend Inv A (MDDVX) A	24.04	18.48	8.24	11.44	$1,000
Dow Jones Islamic Fund Class K (IMANX) B	21.40	13.29	8.14	16.74	$250
Fairholme Fund (FAIRX) B	23.21	19.15	7.93	9.82	$2,500
Fidelity Fund (FFIDX) B-	20.62	14.37	7.90	14.54	$2,500
Fidelity Large Cap Stock Fund (FLCSX) B+	22.75	15.14	8.20	14.72	$2,500
Fidelity Stock Selector (FDSSX) B	19.65	15.21	7.83	15.28	$2,500
Mellon Large Cap Stock M (MPLCX) B-	18.17	13.15	7.80	14.09	$10,000
MFS Union Standard Equity Fund A (MUEAX) B	19.65	16.22	7.79	13.65	$1,000
Oppenheimer Value A (CGRWX) B-	21.73	16.34	8.00	15.35	$1,000
Security Large Cap Value A (SECIX) B	20.04	17.38	7.91	15.95	$100
SELECTED MEDIUM-TO-HIGH-VOLATILITY
Fidelity Growth Company (FDGRX) B+	28.96	18.85	10.93	22.37	$2,500
Fidelity Independence Fund (FDFFX) A+	32.33	19.62	11.56	18.36	$2,500
Hartford Growth Opportunity A (HGOAX) A-	37.78	22.21	11.31	19.81	$1,000
J Hancock Large Cap Equity A (TAGRX) A-	38.09	22.73	11.64	17.59	$1,000
JPMorgan Growth Advantage A (VHIAX) A-	29.69	20.76	11.17	18.19	$1,000
Kinetics Paradigm Fund A (KNPAX) A	35.98	26.71	10.97	11.19	$2,500
Monetta Fund (MONTX) A-	32.23	18.35	10.94	16.07	$1,000
Natixis CGM Advisor Trgt Eqty A (NEFGX) A+	34.68	18.88	10.97	17.54	$2,500
New Alternatives Fund (NALFX) A-	47.78	27.90	11.47	17.77	$2,500
Thornburg Core Growth Fd A (THCGX) A	26.50	24.68	11.61	21.78	$5,000
Data as of 9/30/2007. Source: TheStreet.com Ratings.