Adding Measures of Risk to Your Fund Evaluation

Picking your funds based solely on performance is a common mistake

Return numbers are the most readily accessible pieces of information available to you as an investor. As a result, it is too easy to make fund choices for your 401(k) based on those returns. The level of risk you assume in your portfolio based on fund choices is critical. Unfortunately that information is much more difficult to find and understand.

Morningstar, Inc. (www.morningstar.com) offers a free resource to find risk information on publicly traded mutual funds. If you navigate to the “Ratings and Risk” tab for a fund you are interested in, you can find measures of fund “volatility”. For example, you can see how a fund performs during periods when markets increase in value (Upside Capture) and when markets decline (Downside Capture).

Let’s look at the Upside/Downside statistics for Baron Growth, currently classified as a mid-cap growth fund. The top section of the snapshot below shows the behavior of Baron Growth’s returns versus the S&P 500. For example, over the last ten years, Baron Growth’s upside measure is 114.61 (the S&P 500 in this example would be 100). So, Baron Growth has tended to outperform the S&P 500 by 14.61% during up markets. Conversely, when the S&P 500 drops, Baron Growth tends to drop less than the market over the ten year period.

The bottom section provides you with the same measures for mid-cap growth funds versus the S&P 500 in general. This gives you a chance to see how other funds with similar investment strategies perform against the S&P 500.

If you find funds that perform better than the markets on the upside (a number above 100 on the top line) and the downside (a number below 100 on the bottom line), the fund may be a good addition to your portfolio “recipe”.

“What incentive does a bank have to buy two-year Treasuries at 20 basis points when they can park overnight reserves with the Fed at 25? What incentives do investment managers or even individual investors have to take price risk with a five-, 10- or 30-year Treasury when there are multiples of downside price risk compared to appreciation? At 75 basis points, a five-year Treasury can only rationally appreciate by two more points, but theoretically can go down by an unlimited amount.” – Bill Gross, PIMCO Investment Outlook, February 2012

 

My $3.99 Ground Beef is on Sale!!!

Now I only have to pay $5.95………

Buying stocks is no different from buying any other product – you perceive a value to you, then you look at the price tag. If the price seems fair, you buy. If the price is lower than you thought, you might buy a few extra. If the price is too high, you hold off and wait for a better time.

As simple as that sounds, investors often decide to buy no matter the price. Rumors spread of better economic times or solutions to fiscal problems. Maybe the “everybody else is buying” syndrome kicks in – or the desire to find higher returns “somewhere, anywhere” takes over.

Your retirement dollars are too valuable to follow the herd. Long-term returns are generally enhanced when patience is exercised. We are confident that the patience we exercise in client portfolios will ultimately be rewarded.

Treasury May Let Investors Pay to Lend to US

……..and you thought hamburgers were expensive

The U.S. Department of Treasury, according to recent reports, may allow investors the option of bidding for future Treasury issues with a negative yield.

From the minutes of the latest meeting of the Treasury Borrowing Advisory Committee:

“There was a lengthy discussion regarding the bid-to-cover ratios at recent Treasury bill auctions. It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical. “

What does this all mean? Well, in the near future, you may have the option of giving the US government $10,000, and they will hold it for you for 90 days, and then give you back something less than $10,000.

The goal is to force investors into riskier asset classes in an effort to continue the price inflation we are seeing in most investment categories.

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