Apples and Oranges

Monday, February 10th, 2014

AppleOrangeApples and Oranges

There is a plethora of options available for investors wishing to place their money in a managed fund or portfolio. Differences in the way fees are charged and returns reported have made comparisons between funds akin to comparing apples with oranges. A simple approach for investors is to compare investment funds based on their most recent net gain in value after all fees and tax. In recent times, there has been a huge variation in performance between different investment portfolios, prompting investors with returns at the lower end of the scale to query whether their money is in the right place.

Comparisons between portfolios need to take into account the nature of the underlying assets; otherwise it is yet again a case of comparing apples and oranges. Over the last 18 months, there have been huge gains in the share market and as a result, portfolios with a high weighting towards shares have significantly outperformed those with a much lower weighting towards shares. This is not necessarily a reflection of the performance of the fund or portfolio manager, it is simply that shares outperformed other asset classes over that period. Of course, investing in shares offers the potential of high returns but also the risk of negative returns, which we are seeing at present. While it is tempting to invest heavily in shares when returns are good, experience has shown that the turning point in performance can only been seen with hindsight. It is better to stick to a strategy where you are comfortable with expected losses as well as expected gains. When shares are doing extremely well, your gains may be less, but when shares are doing badly, your losses will not be as great. Understanding your attitude towards risk as well as return is vital for investment success.

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