Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@. Skimlinks & other affiliated links are turned on

Search
  • FIRST POST
    • Prism
    • By Prism 8th Apr 18, 8:13 PM
    • 291Posts
    • 208Thanks
    Prism
    Funds and risk
    • #1
    • 8th Apr 18, 8:13 PM
    Funds and risk 8th Apr 18 at 8:13 PM
    How does everyone assess the risk level of a particular fund they have or are considering buying into? Even describing what risk is can be complicated and mean different things to different people.

    I tend to open the fund up in Morningstar (actually I use YouInvest to do this indirectly) and look at the portfolio. This breaks it into percentages of cyclical, sensitive and defensive sector weightings. From there I tend to assume those funds with a higher percentage of defensive stocks are better protected from a crash or downturn. I will also briefly look at the individual companies in the top 10 assuming I recognise them and if I do make some of my own assumptions.

    I tend not to worry about volatility, sharpe ratio's, sortino ratio's or the FE risk score. I assume others do however - maybe I am missing something. I just find that they don't really seem to tell me anything useful for a long term investment.

    When it comes to bonds my only basic assumption is that gilts are safer from downturns than corporate bonds and that UK bonds are safer than world bonds due to exchange rate variations. I don't yet hold any bonds but probably will in about 5 years.
Page 1
    • Audaxer
    • By Audaxer 8th Apr 18, 11:32 PM
    • 1,019 Posts
    • 590 Thanks
    Audaxer
    • #2
    • 8th Apr 18, 11:32 PM
    • #2
    • 8th Apr 18, 11:32 PM
    I tend not to worry about volatility
    Originally posted by Prism
    I would tend to assess the risk level of a fund mainly by the level of volatility. But just because a fund has a high risk/volatility level certainly doesn't discount it from being in a balanced portfolio. When choosing active funds I looked mainly for ones that had a long history of decent returns, and performed well in relation to it's peers during the 2008 crash.
    • aroominyork
    • By aroominyork 9th Apr 18, 11:46 AM
    • 423 Posts
    • 123 Thanks
    aroominyork
    • #3
    • 9th Apr 18, 11:46 AM
    • #3
    • 9th Apr 18, 11:46 AM
    And how do you assess volatility? FE scores only take into account, I think, the most recent three years and with more weighting to recent periods. In a thread re Japan, dustonh yesterday said "the risk of picking just 5 years is that its a short term snapshot". So how far back to you go? I also have a bit of a habit of looking at 2008 but can you really take one set of circumstances and assume they'll play out the same way in the next crash, or is 2008 just the best we have to go on? I wonder how much of the 20bn in M&G Optimal Income would be invested if the fund had been launched in 2009.
    Last edited by aroominyork; 09-04-2018 at 12:13 PM.
    • rathernot
    • By rathernot 9th Apr 18, 12:51 PM
    • 242 Posts
    • 62 Thanks
    rathernot
    • #4
    • 9th Apr 18, 12:51 PM
    • #4
    • 9th Apr 18, 12:51 PM
    I believe KID documents go off a formula based mostly around volatility.
    • aroominyork
    • By aroominyork 9th Apr 18, 12:55 PM
    • 423 Posts
    • 123 Thanks
    aroominyork
    • #5
    • 9th Apr 18, 12:55 PM
    • #5
    • 9th Apr 18, 12:55 PM
    I believe KID documents go off a formula based mostly around volatility.
    Originally posted by rathernot
    They score 1-7, with the majority of bond funds scoring 3 and equities scoring 5. That doesn't help much.
    • Linton
    • By Linton 9th Apr 18, 1:40 PM
    • 9,333 Posts
    • 9,460 Thanks
    Linton
    • #6
    • 9th Apr 18, 1:40 PM
    • #6
    • 9th Apr 18, 1:40 PM
    I think it is not helpful to worry about the volatility of individual funds in your portfolio. The important thing is the behaviour of the whole portfolio. Provided you ensure that your funds are not strongly correlated you should find that the volatility of the portfolio is significantly less than that of the majority of its constituents.

    For example although Linton Growth is more than 50% small and medium companies and includes funds close to 200 in the Trustnet score the overall Trustnet volatility is less than that of VLS100. The problem with a portfolio of relatively stable larger companies is that they tend to be rather highly correlated.

    I think I would go further and say that if you want to control your portfolios volatility you should deliberately seek out higher volatility components to reduce correlation..
    • aroominyork
    • By aroominyork 9th Apr 18, 1:53 PM
    • 423 Posts
    • 123 Thanks
    aroominyork
    • #7
    • 9th Apr 18, 1:53 PM
    • #7
    • 9th Apr 18, 1:53 PM
    I think I would go further and say that if you want to control your portfolios volatility you should deliberately seek out higher volatility components to reduce correlation..
    Originally posted by Linton
    Interesting counter-intuitive perspective. How do you most effectively assess correlation between funds you are holding? Is it by looking at geography, sectors, value/growth, market cap etc., or is there a (preferably free) tool?
    • Linton
    • By Linton 9th Apr 18, 2:08 PM
    • 9,333 Posts
    • 9,460 Thanks
    Linton
    • #8
    • 9th Apr 18, 2:08 PM
    • #8
    • 9th Apr 18, 2:08 PM
    Interesting counter-intuitive perspective. How do you most effectively assess correlation between funds you are holding? Is it by looking at geography, sectors, value/growth, market cap etc., or is there a (preferably free) tool?
    Originally posted by aroominyork
    Morningstar portfolios come with a monthly report similar but different to the standard Xray. It includes a correlation table of the top 10 individual funds. However I believe that is part of the paid-for service.

    Also I monitor all of the factors you list (geography, sectors, value/growth, market cap) for the portfolio as a whole and rebalance to try to keep them roughly in line with their values when the portfolio was set up.
    • gif1
    • By gif1 9th Apr 18, 2:32 PM
    • 26 Posts
    • 4 Thanks
    gif1
    • #9
    • 9th Apr 18, 2:32 PM
    Value Vs Growth
    • #9
    • 9th Apr 18, 2:32 PM
    Very interesting thread. Going forward how would you assess value against growth? Just by looking at the P/E ratio? Low ratio is value, higher is growth?
    Thank you
    • economic
    • By economic 9th Apr 18, 2:39 PM
    • 2,940 Posts
    • 1,579 Thanks
    economic
    I like to look at threads like this and laugh at the comments people make for one very simple reason:

    In any market in any region of the world, there is always a time to buy and always a time to sell any investment. Looking at fundamental analysis, technical analysis, volatility (historical and implied vol), sharpe ratios, fund manager performance (historical again), fund manager investment strategy: They all sound nice and and one may get a warm fuzzy feeling using these metrics when deciding on investments. But in reality they never always work on a long term basis. And pretty much everyone on these boards are investing for the long term.

    My only advice is to not put all your eggs in one basket, seek out risk to try to get lucky and realize that you will need luck on your side to come out the other side as a winner.
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

1,991Posts Today

8,527Users online

Martin's Twitter