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The BFM Team
Why Investing in a Fund with Negative Performance and Higher Volatility/Risk Could Be a Good Idea!
At BFM, we not only add value to our clients by helping them choose better funds with lower expenses and tax treatment,
but also by improving their portfolio construction
Sometimes, when we build portfolios for our clients, we recommend adding a new fund for diversification purposes. In the two examples below, we show that investing in a fund with a negative performance and higher risk / volatility could benefit the portfolio by increasing the performance and reducing the risk / volatility!
Let's assume an old portfolio with Fund A (60% of the portfolio) and Fund B (40% of the portfolio)
that have a 0.2% and 3.7% performance respectively over a 3-year period.
As you can see, by adding Fund C (10% of the portfolio) with a negative performance (-3.5%), the new portfolio has now a 0.9% better performance (from 1.6% to 2.5%)!
When adding a new (more volatile / riskier) Fund B in a portfolio, the new portfolio volatility is now 8.9%... lower than the volatility of each Fund A and Fund B of 10% and 20%.
The volatility is lower because the new Fund B returns are uncorrelated.
Here are more details about the calculation
Conclusion: Remember to Check the Correlations of the Assets in Your Portfolios
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We invite you to set up a complimentary meeting with the team at Bourbon Financial Management. We would love to get to know you better, your lifestyle, share with you how we help our clients, and also show you how we can be a valuable resource to achieve your financial goals. Understanding and developing long lasting relationships with our clients is a critical component in our process. We look forward to meeting you!