Why does BFR place such a high priority on managing volatility?

Volatility in a portfolio is usually measured relative to total market volatility. For example, let's define the total market as the Standard & Poor's portfolio of 500 large capitalization stocks, the S&P 500 Index©. In this context, our standard of volatility is the S&P 500 Index which is defined as "1". If our portfolio moves up and down an average of 10% more than the S&P 500 Index, then it has a volatility measurement of 1.1. If it moves 10% less, then its volatility is 0.9.

While the calculation of a portfolio's volatility is complex, the underlying concept is simple: How much do your investments change in value relative to the total market? Obviously, we would all like our investments to have a high volatility measure when the market goes up and a low one when it goes down.

BFR manages investments to achieve this objective for two reasons:

  1. We believe that managing volatility is the best way to achieve long-term stable portfolio growth. Although volatility is beneficial in good markets, it rapidly erodes your gains in bad ones. We manage our clients' portfolios to capture gains in bull markets and protect them in bear markets. We use a set of tools to evaluate a range of economic factors and market forces to determine when and where to invest, and of equal importance, when and where not to invest.

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  2. The second reason is what we call the "ulcer factor." As we said above, we want our portfolios to have a high volatility reading in bull markets and a low one in bear markets. We define the ulcer factor as your portfolio's performance in a down market. The less the downward volatility, the lower the ulcer factor for our clients. We are committed to providing our clients with investment management services that allow them to focus on the things in life that are most important to them, not to worry about a down day on Wall Street. Managing downside volatility permits our clients to enjoy their lives today and feel more secure about tomorrow.