Near Term Performance is Predictive
Why NoLoad FundX Groups Funds by Risk not Style

Some strategies group funds by investment style – separating value funds from growth funds, for example, or small cap funds from large cap funds. Upgrading mixes funds into broad classes based on risk, not style.

We intentionally mix growth funds and value funds, international and domestic funds and large and small cap funds so that we can see which of these funds is doing well now. Upgrading is designed to lead us to the best performing areas of the market, and in order to find what part of the market is doing best, we have to compare many different areas of the market.

If we looked only at growth funds, for example, we wouldn’t know if value funds were really the place to be. A combination of only domestic growth and value funds still wouldn’t work. How would we know if international funds were actually outperforming? Instead, a broad mix of funds leads us to the winners. It leads Upgraders to the funds getting it right, right now.

Another benefit of categorizing funds by risk rather than by style, is that it enables us to control our exposure to riskier funds. Within each risk class, we can confidently compare funds based on current performance, and move between them without increasing the risk of our overall portfolio.

Risk Class Volatility

To illustrate the difference in volatility of the funds in NoLoad FundX’s risk classes, we compared the average returns of each class on the chart below. You can see that on average Class 1 (yellow) is the most volatile of the classes over time. It experienced a level of volatility that few investors could stomach.

Class 3 (green) has the best trade-off between risk and return. It was much less volatile than Classes 1 or 2 (black), but posted higher total returns than Class 4 (gray).

The chart looks at a long window of time and there are shorter periods when the difference in volatility is less obvious. The chart also shows the average of holding all of the funds in the risk class, equally weighted and rebalanced annually. Upgrading has produced better results, but we believe that prudent investors should consider the average volatility of each class as a baseline before investing.