Finding out how your managed fund is performing is an essential part of monitoring your financial position. It’s even more important given that your fund’s performance will usually make a big difference to how much money you will have to retire on. So how do you judge your managed fund’s performance? Here is a simple guide that may help you make sense of the numbers.
• Strong today… weak tomorrow?
If fund managers that performed the strongest in the past always did well in the future, investing would be easy. You’d simply look through the managed funds performance tables in the newspaper and pick out the top performer and stick with them forever. Unfortunately, the reality is that fund managers will all have their moments in the sun, and performance will fluctuate widely over the short term.
• Compare apples with apples
There’s a real danger in comparing performance numbers between managed funds without checking that you are comparing ‘like with like’. Often, performance numbers provide no clue as to how much risk has been taken to achieve the result. Returns may also be quoted before or after fund management fees and tax (ie this will often account for differences in returns between funds). Lastly, there’s no point trying to compare two funds with different asset allocations – it’s like comparing a football team with a basketball team. They’re doing different things.
• Be aware of frequent switching
Chasing past performance is the simplest way to go backwards financially. Research by DALBAR in the United States (US) showed that the US share market increased by 12.98% per annum (over the past twenty years to the end December 2004) but the average investor received an annual return of just 3.51% over the same period. The average investor barely kept pace with inflation. Put simply, investors who tried to chase performance and regularly switched their investments were worse off in the long run. Instead of fretting about short-term performance numbers, give your fund time to perform (most funds will recommend a minimum time to be invested) and resist the temptation to switch funds on a regular basis.
• Give your investments time to perform
When assessing your funds performance, what time period should you look at? The Australian Securities and Investments Commission advise that you should allow a minimum of five years when judging investment performance. In fact, they say that short-term numbers (12 months or less) are all but useless.
It’s worth remembering that only a few years ago (March 2003), the Australian share market was delivering negative returns. Many investors who bailed out would be kicking themselves for missing the resurgence of the share market that was just around the corner.
• Your own behaviour is also crucial
Aside from investment returns, your overall financial plan, tax strategy, personal savings discipline and personal insurance protection plans play an important role in building wealth. How much you save, spend and invest will play a critical role in the long term. The main key to successful investing over the long term is to make the right choices across all these areas - and to do that you need quality advice.
Of course, you should always check with a financial adviser to see if this advice is suitable for your personal circumstances. For a no-obligation appointment, call ipac today on 1800 626 881 or log onto www.ipac.com.au.