The evaluation of investments can be an intimidating 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 saving for retirement or beating inflation?
Your points of comparison (or objectives) are the facilitators of your evaluation. This can also be 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 trust investments that offer a bit more stability and somewhat lower risk (e.g. a balanced fund).
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. It’s worth having a look at your investment manager’s full track record. It’s important that the timeframe is long enough so that you can gauge his/her performance through the ups and downs of a number of market cycles. Â
The unit trust’s fact sheet is a handy evaluation tool because it shows the maximum losses, performance of the investment, as well as statistics measuring volatility throughout the history of the unit trust.  This can give you a more comprehensive platform to judge overall performance.
- Outperformance is relative to your objectives
The financial landscape can experience downturns and on paper it may look as if your investment is underperforming.
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, your benchmark is the point of comparison on which you should evaluate the performance of your investment.