From time to time, new clients coming to see us express concern about their investments.
They have invested money, perhaps in a pension plan or an investment portfolio, and are disappointed with the returns they have achieved.
In our experience there can be a number of reasons for this;
It may simply be that the investment choice they have made has simply not done very well compared to similar types of investments.
If you think about it there are so many different ways to invest money that a comparison between one investment product or fund is always going to show one up to be better than another.
But is does not necessarily mean that your investment is bad and another persons is good, it is simply that they are different.
So if our investor is comparing her portfolio to other investors, she might have felt her investment had not performed very well.
This is relative performance; performance compared to something else (other funds or maybe an index that follows a “basket” of funds).
The fascinating thing about investments of all types is the variability of returns.
In some years they can be negative returns, in other years very positive. This is simply the nature of investing in assets that can be priced based on demand for em and economic and investment conditions in a highly complex world.
Certainly all of the main types of investment assets (the general description of the type of investment) rise and fall in value at different rates over different time periods.
One of the reasons for disappointment that we often identify is the absence of a SMART goal (Specific, Measurable, Achievable, Realistic and Time based).
So we will ask “what are your financial planning goals and objectives?” We ask this because it brings relevancy to the determination of whether or not an investment return has been satisfactory or not.
If your portfolio grew in value by 2% or 3% last year for example that might be perfectly fine as long as it meant that you continued to meet your financial planning objectives.
The problem that many people have is that they don’t have a clear link between investment returns and financial planning goals. For example if the investment objective is the imprecise one of “growth”, what rate of return is satisfactory? Could the answer be 1%?
If it is then we would say is that plus or minus the rate of inflation? Hopefully it is 1% plus the rate of inflation so that it least it is a “real” rate of growth.
The fact of the matter is that there is no such thing as a normal rate of investment growth.
All investment funds and types tend to grow (and of course fall) in value over particular periods of time. Amongst the most important things for you to consider are;
* what are my financial planning goals and objectives?
* are my pension, savings and investments aligned to achieve those goals and objectives?
* am I taking too much or indeed too little risk with my money?
* do my investments match my appetitive for the degree of risk that they are exposed too (can I sleep at night?), and
* in the event that my investments do fall in value can I tolerate any loss at all?
The reality is there is no such thing as a “normal” rate of investment return but there is certainly a need to ensure that your investment portfolio is suitable for you.
Photo credit: Flickr/Kapungo
