Opinion – Grain in Grain: When choosing your stock fund, be careful with those that are most valued

Due to lack of knowledge and tools, return ends up being the fundamental criterion when choosing equity funds. Investors usually rank funds on platforms by performance and choose the first with the highest return. If return is the only criterion available, consider two additional metrics to avoid frustration.

Who wouldn’t want to see the return of products that have performed the best in the past?

However, it is important to understand that this return is past. If you apply to a product now, what you get is what will be presented in the future.

The big problem with the selection based only on the past classification is that every period there will be a new first place, and it is rarely repeated.

Often, the first place of one semester becomes the last of the following semester and vice versa.

The mistake is in believing that past performance is repeated. It may even happen, but as it is said in the footers of the products, it is not guaranteed.

The return metric is not suitable for ranking.

Thus, the best information you can extract from the return is its variability, that is, the risk.

I often say that when you invest in an equity fund, you don’t buy its past performance, but only its risk, or the usual variability it has had.

So, rather than just looking at the ones that rose the most, look at the variability of performance over shorter periods. For example, monthly returns.

There are currently free platforms where you can extract variability or risk information. For example, Most Return.

Prefer funds that have had better risk control.

Thus, instead of preferring those who earn more when the index rises, prefer those who lose less when the Ibovespa falls.

Remember, if an asset depreciates by 50%, it needs to go up 100% to replace the lost value. That is, protecting yourself from losses makes you rebuild your portfolio faster and accumulate more in the future.

It’s no wonder Warren Buffett’s famous rule: Rule No. 1 – never lose money; Rule #2 – never forget Rule #1.

Another return-based metric is consistency, for example the number of months the fund has a positive return versus the number of months it has a negative return.

Look to invest in equity funds with a ratio of 1.5. That is, the number of months with positive returns outweighs negative ones by at least 50%.

An investment that fluctuates a lot between positive and negative makes for a bad experience, and eventually, you may end up not taking it and exiting when you are close to a new high.

I emphasize that when evaluating very old products, it is important to assess whether these metrics are getting worse over time.

I emphasize, again, that return is not adequate to evaluate a fund.

The ideal is to evaluate the 5 Ps of the fund, but I understand that, often, investors in general do not have the tools for this and simple rules can help in the choice.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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