Evaluating Returns Requires Investment-Performance Perspective
When you want to evaluate your investment returns, what do you
compare them to? Do you compare your returns to those of friends
and neighbors, or maybe to random market indexes?
Your goals and objectives
For many investors, the most important indicator of success is how well they meet their long-term goals. After all, what good is it if your portfolio’s return beats an arbitrary benchmark but is not in line with your long-term investment needs and tolerance for risk?
Whether saving for retirement or for a child’s college
education, the first step toward reaching your goals is to
develop a financial plan against which your progress can be
If your portfolio consisted of mostly smaller company stocks, the S & P 500 wouldn’t have been a good benchmark in evaluating your portfolio’s performance.
Investment styles, such as growth or value, are cyclical in nature and can outperform each other at different stages of market cycle. In 1997, growth stocks generally outperformed their value-oriented counterparts.
In addition, U.S. stocks generally outperformed international stocks. There are many subcategories of these general investment styles that also should be considered. Therefore, one would not expect a small company, growth-oriented manager to perform in line with a large company, value-oriented manager.
Risks versus return
In the financial industry, we generally define risk in terms of
volatility of a portfolio’s returns over time. This is because
the volatility of an investment’s returns will affect an
investor’s ability to achieve his long-term financial goals.
Historically, investors have been rewarded with higher long-term
returns in exchange for assuming greater investment risk.
The allocation of your assets will influence your investment
returns. So, keeping track of investment performance is critical in any
successful financial plan. However, with so many variables to
consider, investors often lose their long-term perspective and
focus on one thing – short-term return. Losing the performance
perspective can lead to misinformed investment decisions that
make it more difficult to achieve long-term goals.
Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.
This page was last reviewed and/or updated on Friday, July 03, 2015 05:21 PM