The evaluation of investments can be a daunting task. Here are five recommendations and a checklist that can help guide you through the process.
- Measure against your objectives
What is the purpose of your investment? Is it to achieve specific financial goals such as investing for retirement or beating inflation?
Your points of comparison (or objectives) are the facilitators of your evaluation. This purpose is also referred to as your ‘benchmark’.
- Performance is not linear
Returns shouldn’t be gauged on a linear scale because investments can gain or lose value at different rates over a specific period of time. This can be due to the varying degrees of volatility of the specific unit trusts in which you’ve invested.
There is a trade-off that should be considered: unit trusts with a higher return potential can be more susceptible to fluctuation (e.g. an equity fund), than unit trusts that offer a bit more stability and lower risk (e.g. a balanced fund).
However, while their comparative performance may seem quite different on paper, it’s possible that they could yield a similar return over time.
Once again, your financial goals determine the choice of investment product or unit trusts.
- Measure against industry standards
Investment managers decide on appropriate benchmarks against which they measure the relative performance of the unit trust. This measure helps you understand how your unit trust is performing.
- Assess performance through the market cycle
Look further than the recent past when assessing your investments. This can give you a much more comprehensive platform to judge the efficacy of the performance It’s a good idea to monitor their track record through a number of market cycles as well.
- Outperformance is relative to your objectives
The financial landscape can experience downturns and on paper it may look as if your investment is underperforming, but this depends on your financial objectives.
For example, if your objective is to obtain a growth of 7% over a specified period of time and your investment yields 6% growth, it may appear that it’s underperforming. However, relative to a market growth of 5% over the same period, the investment has outperformed the market.
Here’s a helpful checklist to gauge the performance of your investments
- The evaluation of investment performance depends on your specific benchmark – in other words, the investment product or unit trusts need to correspond with your investment goals.
- Performance of investments shouldn’t be judged on a linear scale; certain unit trusts can have a higher susceptibility to fluctuation.
- It’s important that your expectations are realistic and that you fully understand your investments.
In summary, the evaluation of investment performance all comes down to your objectives.
Your benchmark is the point of comparison on which you should gauge your investment performance.
