A. It depends on what kind of investor you are, for some, the simple fund ratings might not be helpful at all, here is why -
Fund rating systems from Morningstar or S&P Capital IQ don't take into account the investors' risk aversion levels, which could vary significantly from person to person.
What is Risk Aversion?
The best example to illustrate what is risk aversion is probably the following coin-flip game -
For head you gain $200, for tail you lose $100, will you play this game?
Surprisingly, most people won't play this game because of the potential loss of $100, even mathematically you could gain from this game.
By adjusting the different payoff figures in order to attract you to the game, you could measure your level of risk aversion. Use the following tool to check your level of risk aversion - digitai.org/#lab.
In our next blogpost, we will discuss why different people's risk aversion leads to ineffectiveness of the fund ranking guides.