Investment with safety in-mind

When we invest in a fund, we can typically see its many performance matrices including YTD, 1 year, 3 year and 5 years. What we don’t typically see is how much risk a fund or a fund manager takes in order to generate that return. The riskier the fund, the harder it is for an investor to hold on to that investment during a downturn. There are several financial ratios to measure the effectiveness of a fund manager and the associated risks. One of the things we normally watch out for is Sortino ratio. According to Investopedia, Sortino ratio was named after Frank A. Sortino. It is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset’s standard deviation of negative portfolio returns instead of the total standard deviation of portfolio returns. The Sortino ratio takes an asset or portfolio’s return and subtracts the risk-free rate, and then divides that amount by the asset’s downside deviation.

If you look at a broad market fund such as Fidelity Blue Chip Growth fund (FBGRX) vs Schwab S&P 500 Index Fund (SWPPX) for the last 10 years, Fidelity Blue Chip Growth Fund (FBGRX) has a annual return of 18.8% with a Sortino ratio of 1.91 vs annual return of 13.57% with a Sortino ratio of 1.53 for the S&P 500 index fund. This means that the fund is able to achieve a better return with a better adjusted risk profile. See chart below, portfolio 1 is Fidelity Blue Chip Growth fund (FBGRX)

When we using the Sortino ratio as a guide on fund search, below are some of the highest Sortino ratio funds according to Portfolio Visualizer

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