What are Low Risk Mutual Funds?
A frequently asked question on our Low Risk Mutual Funds blog is “What is a Mutual Fund?” and if you read the prospectus of a particular fund you will typically find a mutual fund is an investment vehicle that invests in a particular asset class or classes and typically MUST be fully invested at all times (or at least 60-80% minimum).
That can present a huge conflict if the market is dropping precipitously. Mutual funds are actually typically restricted from getting out of stocks when they are going down. There is no trigger that can stop the bleeding and unless your broker is smart enough to get you out before the drop, it can be a disaster. Since she only gets paid if you stay fully invested, he will likely tell you that you need to think long term and stay invested. But what if you are nearing retirement and your long term is 5-10 years from today. Can you afford to take a 40% loss to your portfolio? Or will a 40% haircut mean that you cannot retire for another 10-15 years?
There is another way.
Low Risk Mutual Funds Look-Alikes
There are Private Wealth Management Funds that look and feel a lot like low risk mutual funds because they buy asset classes just like mutual funds such as stocks or bonds, but many of them if you read the fine print in their prospectus, have the ability and flexibility to avoid some of the problems and restrictions associated with a classic mutual fund. They have the flexibility to evaluate the market and when things appear to be getting weak, they can go to 100% cash instantly to protect principle in order to avoid a scary drop such as that occurred in 2001, 02, 09, etc.
That was a primary goal of mine when researching funds and investment opportunities. What funds did not lose money in the most volatile years in the stock and bond markets? I thought I was looking for low risk mutual funds, but what I found out was that there really were not any low risk mutual funds because of the restrictions detailed in their prospectus. What I did find when I did my research was a whole new class of funds that could not actually call themselves mutual funds because they played by a slightly different set of rules than I was conducting my search for.
Low Risk Mutual Funds Are Not Mutual Funds
These low risk mutual funds are not technically low risk mutual funds, but rather private wealth management funds. Their performance is like nothing I have ever seen in a mutual fund. Some might even say it is too good to be true because they did not lose money in some of the most volatile years of the stock and bond markets, but the funds had dramatically less volatility in every measure you can use to measure volatility. Sharpe Ratio, maximum draw down, standard deviation, sum of deviation, beta, as well as alternative risk-adjusted return methodologies which have emerged over the years, including the Sortino Ratio, Return Over Maximum Drawdown (RoMaD), and the Treynor Ratio.
If you have an interest in getting an expert evaluate your mutual funds to show you the risks you have and compare them to some other possibilities that may work well with your investment strategies, contact us and we can show you a few pretty interesting things.