Judging investment performance

We all have different attitudes to investing. Some people are conservative and don’t like any variability in returns. Others accept the roller coaster of the share market as a short-term price to pay for better long-term performance. Some people will have both of these attitudes – conservative with their short-term savings and aggressive with their long-term investments.

It is probably unfortunate that the short-term performance of long-term investments is reported so often. The media often makes announcements such as “super funds balances boomed last month” or “share investors go backwards in one day”. Returns over short periods are probably irrelevant to a long-term investor.

But this reporting does shape the way people think about their investments particularly where shares are involved. You can expect shares to fluctuate in value over the short term but perform well over complete economic cycles.

There is a theory that when investors hear about these short-term returns they react in three different ways. Obviously, reactions depend on the most recent investment performance, but these are the most commonly made judgements (they might be familiar to you):

“I could have done better in the bank”

There will be times when growth assets under-perform term deposits. A lot of investors have thought this in recent years. As we are now witnessing with low interest rates, this is not true at the moment.

“I missed out”

There will be times when shares and property surge and someone you know will tell you they achieved 50% or 100% returns. The Australian residential property market was like this in 2002 and 2003 and the share market was similar between March and September 2009. Don’t worry, that time will come again so get in and stay in.

“I’m going backwards”

There will be times when shares produce negative returns. However history has proven time and again that sound share investment sees you “going forwards” over the long term.

Trying to achieve above-average returns at all times throughout the investment cycle is a recipe for disaster. It is tempting for investors to try to “time the market” – moving between asset classes by trying to predict the “next winner”. A better approach is to choose your own benchmark that will enable you to meet your goals. Then focus on a long-term strategy to achieve this return. A prominent investment axiom states “time in the market is more important than timing the market”.

Your financial adviser can help design a portfolio to meet your specific needs for the short and long term, so you don’t have to carry any regrets.

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