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I am confused as to why mutual funds/ETFs in lets say BRSVX - Bridgeway Small-Cap Value could be considered having any risk since the 5 year return is at 17%. Doesnt that mean that in 5 years it hasn't lost value ? What is the risk ?

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    It means in the last 5 years it went up 17%. In the next 5 years it could go up 17% or it could go up 3000% or it could go down 100%.
    – user253751
    Aug 18, 2021 at 15:02
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    As a worst case, suppose the fund is being run by someone like Bernie Madoff, and those good returns are because it's a Ponzi scheme. Then the fund manager absconds to someplace without extradition... fbi.gov/scams-and-safety/common-scams-and-crimes/ponzi-schemes
    – jamesqf
    Aug 18, 2021 at 17:43
  • 5 years in an up market doesn't tell you squat about the fund. Give it 20 years and let's talk. There hasn't been 1 crash in the last 5 years, one small dip only that recovered quickly. If the fund doesn't include at least 1 crash then you don't know anything about the fund yet.
    – Jonast92
    Aug 20, 2021 at 13:26

3 Answers 3

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"risk" doesn't mean "chance of losing money". It means "variance of returns". If an ETF averaged 17% over 5 years that could mean that it lost 5%, gained 25%, gained 2%, etc. and averaged (geometrically) 17% over those 5 years.

An ETF with zero risk will have a perfect exponential growth curve, while an ETF with high risk will have a very jagged growth curve. You can have a "high risk" ETF that never loses money, but the returns vary wildly between zero and 5%.

In general, funds with higher returns on average have higher risk. So if you're a short-term investor and don't want to risk losing in, say, one year, you want a low-risk ETF. If you're saving for retirement in 30 years you don't necessarily care what it does in the next year and are willing to take risk to have a higher expected gain over those 30 years.

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    This investment firm's "Periodic Table of Investment Returns" is a great way to get a feel for how variance of returns plays out - and how eye-popping returns are often followed by lean years: callan.com/periodic-table Aug 18, 2021 at 17:39
  • Your answer is the best sofar. "risk" doesn't mean "chance of losing money". It means "variance of returns". - explains a lot. Im planning on buying this portfolio for between 5-20 years, possibly longer - but the person I'm looking into this for is about 70. He isn't counting on the money per say but you never know. In this situation it sounds like volatile like BRSVX is the way to go. Does that make sense ?
    – DES
    Aug 18, 2021 at 18:10
  • It makes sense in that with a 5-20 year horizon you can afford to take more risk (reducing risk the closer you get to needing the money. If someone needs the money within the next year then you probably want less risk - but that's a very simplistic answer.
    – D Stanley
    Aug 18, 2021 at 19:20
  • "You can have a "high risk" ETF that never loses money, but the returns vary wildly between zero and 5%." I... really disagree with that, about as much as is possible. Why? Because that ETF never loses money, and a "never loses money" ETF is about as risk-free as you can get.
    – RonJohn
    Aug 20, 2021 at 7:01
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Doesnt that mean that in 5 years it hasn't lost value ? What is the risk ?

As this chart clearly shows (just Google "BRSVX"), there's quite a risk. If you needed the money any time from December 2018 through November 2020, you'd have lost money.

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I am confused as to why mutual funds/ETFs in lets say BRSVX - Bridgeway Small-Cap Value could be considered having any risk since the 5 year return is at 17%. Doesnt that mean that in 5 years it hasn't lost value ? What is the risk ?

That is the past, and the numbers you quote are saying what would have happened if you owned the shares for the full 5 years.

Look at the chart that show the last 5 years. It isn't smooth, there are periods where you didn't make 17%. There are even periods where the price per share went down. If you had to buy or sell at the wrong time your results could be very different.

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