Excerpted from Common Sense on Mutual Funds by John C. Bogle, page 131

On the record, index funds based on both the Standard & Poor's 500 Index and the Wilshire 5000 Index are somewhat less risky than the average mutual fund. Morningstar Mutual Funds calculates a risk factor for each fund based on its returns in the months in which it underperforms the risk-free Treasury Bill. Morningstar's data show that, over the past decade, a typical S&P 500 Index fund was fully 15 percent less risky than the average mutual fund; over the past five years, a typical S&P 500 Index fund was 19 percent less risky, and a Wilshire 5000 Index fund was 18 percent less risky.

YAHOO! FINANCE TIP Yahoo! Finance reports a mutual fund's risk statistics on its risk page. For an example, see VFINX's risk page.

Looked at in a different way, the standard deviation of return over the past decade has been: S&P 500, 14.3 percent; Wilshire 5000, 14.0 percent; average U.S. diversified mutual equity fund, 14.8 percent. Conforming to the Morningstar format, then, if the standard deviation of the average fund were rated at 1.00 for the decade, the S&P 500 Index fund would be rated at 0.97, and the Wilshire 5000 Index fund, at 0.95. (See Table 5.2.) Taken together, the Morningstar risk data and the relative standard deviations make it clear that, despite the fact that managed equity mutual funds do indeed maintain modest reserve positions - and have the ability to raise even more reserves in anticipation of market dips - their risk exposure has been systematically, and often significantly, greater than that of the fully invested broad market indexes.