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"What Can You Do If You Have a Mismatch? So how should investors attempt to mend fences if their risk tolerance is fighting with their risk capacity? A couple of ideas come to mind.
Employing hybrid-type funds as core holdings is one way to help heal the divide, especially for investors with a high risk capacity but below-average risk tolerance. Such investors might seek out investments that are primarily composed of stocks, but hold smaller positions in more conservative securities that help tamp down volatility; that's the approach in play at fine funds such as Vanguard Wellington (VWELX) and T. Rowe Price Capital Appreciation (PRWCX)."
PRWCX. ABOVE-average volatility, albeit with HIGH returns, as rated by Morningstar. This fund is mentioned in here at Mutual Fund Observer with glowing estimates and recommendations. Is Morningstar simply wrong about its above-average risk profile?
Wrong hed for this article; correct url is http://news.morningstar.com/articlenet/article.aspx?id=630335, and it's a lame article, makework for a slow day. M* site is partly down at the moment anyway. Have never been able to understand the strong and regular enthusiasm for PRWCX anyway. Good fund, no better in most ways than its many good peers.
The M* risk grade is relative to the fund's category, which is 'moderate allocation'. Moderate allocation means between 50% and 70% stocks. If PRWCX gravitates above the midway point most of the time, I'd guess that its risk profile would become elevated on that basis alone (PRWCX will also hold some junk bonds most of the time). So it's above average risk compared to its category. If you compared it to funds with similar returns (which are 'high' in its category, but would be average in some other categories) I think it would have a below-average risk profile, though I'm not sure where I could find the numbers to prove it. Statistics are useful, even crucial, but there are always various ways to look at (analyze) them, and they should always be looked at critically.
Comments
So how should investors attempt to mend fences if their risk tolerance is fighting with their risk capacity? A couple of ideas come to mind.
Employing hybrid-type funds as core holdings is one way to help heal the divide, especially for investors with a high risk capacity but below-average risk tolerance. Such investors might seek out investments that are primarily composed of stocks, but hold smaller positions in more conservative securities that help tamp down volatility; that's the approach in play at fine funds such as Vanguard Wellington (VWELX) and T. Rowe Price Capital Appreciation (PRWCX)."
PRWCX. ABOVE-average volatility, albeit with HIGH returns, as rated by Morningstar. This fund is mentioned in here at Mutual Fund Observer with glowing estimates and recommendations. Is Morningstar simply wrong about its above-average risk profile?
The M* risk grade is relative to the fund's category, which is 'moderate allocation'. Moderate allocation means between 50% and 70% stocks. If PRWCX gravitates above the midway point most of the time, I'd guess that its risk profile would become elevated on that basis alone (PRWCX will also hold some junk bonds most of the time). So it's above average risk compared to its category. If you compared it to funds with similar returns (which are 'high' in its category, but would be average in some other categories) I think it would have a below-average risk profile, though I'm not sure where I could find the numbers to prove it. Statistics are useful, even crucial, but there are always various ways to look at (analyze) them, and they should always be looked at critically.
Regards,
Ted