Investors should ask three questions
If you are a nurse chances are that you have investments in either mutual funds, stocks or a combination of both and very often it can be difficult to avoid looking at daily, weekly or the annual performance of your portfolio and compare it to other investments.
There are magazines and news reports that every year share the best-performing stocks and best performing mutual funds and they normally break it down on an annual or basis.
As you are looking at these reports and reading these magazines you’re probably hoping that your fund will be among those top performing funds, or you may be looking at the best performing funds to gain new ideas for your portfolio going forward.
Do you actually understand what the performance numbers mean and how it relates to you and how to really know if you have a great portfolio with the right assets or is it mostly hype.
When you realize you have to look at the overall performance picture, you’ll be in a better position to answer essential questions about how to select and create a great portfolio.
To look behind the numbers, investors should ask three questions during any performance analysis:
How active or passive was the manager’s strategy?
Make sure you understand what the strategy behind the fund is and what its objective is and if it the fund is actively managed or if it’s an index.
Did the manager’s performance justify the fund’s risk exposure?
If you are evaluating performance over decades, you can afford to focus on returns more than risks. The problem is that most magazines and reviews rank funds based on periods of one year or less. It’s very important to take risk into account in gauging the fund’s short-term returns, because the fund that is “best” in an up market is a good contender to be “cold” when the market turns down.
How did the fund perform against its peers?
i.e., the performance of other funds with similar investment objectives.
The fact is that Past performance is no guarantee of future results.
That’s why we caution against “chasing returns,” since a fund that performed well over any given time frame often does not continue to perform in the same way moving forward.
Instead make sure you understand your timeline, your risk profile and understand what you are investing in