203) Why Volatile Funds Has More Effect On Total Return
Assume below are the Annual Returns (AR) by calendar year for 3 funds.
Fund A:
2015: +10%
2016: -15%
2017: +5%
Fund B:
2015: +5%
2016: -10%
2017: +5%
Fund C:
2015: +10%
2016: -25%
2017: +15%
Which fund will give you the BEST returns after 3 years?
What is the Total Return for Fund A?
(1+Total Return A) = (1+AR 2015) x (1+AR 2016) x (1+AR 2017)
(1+Total Return A) = (1+10%) (1-15%) (1+5%)
(1+Total Return A) = (1.10) (0.85) (1.05)
(1+Total Return A) = 0.9818
Total Return A = 0.98175 - 1
Total Return A = -0.01825 = -1.825%
What is the Total Return for Fund B?
(1+Total Return B) = (1+AR 2015) x (1+AR 2016) x (1+AR 2017)
(1+Total Return B) = (1+5%) (1-10%) (1+5%)
(1+Total Return B) = (1.05) (0.90) (1.05)
(1+Total Return B) = 0.99225
Total Return B = 0.99225 - 1
Total Return B = -0.00775 = -0.775%
What is the Total Return for Fund C?
(1+Total Return C) = (1+AR 2015) x (1+AR 2016) x (1+AR 2017)
(1+Total Return C) = (1+10%) (1-25%) (1+15%)
(1+Total Return C) = (1.10) (0.75) (1.15)
(1+Total Return C) = 0.94875
Total Return C = 0.94875 - 1
Total Return C = -0.05125 = -5.125%
Looks like all the 3 funds made losses after 3 years.
So, the BEST of the worse fund is Fund B which had the least loss.
In terms of volatility, Fund C is most volatile. Fund B is least Volatile. However, the 3 funds are volatile if compared to Bond or Money Market funds.
What is the moral of the Story?
Beware of the Volatile funds that gives Big negative returns.
One big negative returns can wipe out all your past profits. You will need a longer time to break even and make some profits.
One idea to reduce the risk of volatile returns is to diversify your investment portfolio.
Do invest into different asset classes and into different regions.
Do consult your financial consultant on how to diversify your investments.
No comments:
Post a Comment