Zoom Out Don’t Zone Out
As we approach the end of the year, many of us would take some time to take stock of what has passed and then looking forward, set resolutions or fresh targets for the new year.
For investors, the report card for investing in 2022 is about to be sealed into history in a matter of weeks. Factsheets of investment performance will soon be published with information which could be similar to the diagram below.
In 2020, a global portfolio represented by the MSCI World Index (at the end of Mar 2020) would have shown disappointing figures across most time periods. Year-to-date losses stood out at -21.05% with barely positive returns even when measured over a 3 year timeframe. As global equity portfolios generally have a long-term expected return in the 8% range, many investors would then begin to ponder; “Why did I invest? I should have kept the money in the bank.”
However all declines are not permanent (unless you hold single stocks, concentrated, narrowly focused, or esoteric strategies) and by end of that year, markets regained confidence and started functioning as usual.
The score card showed a markedly different figure just nine months apart. All periods showed healthy double digit numbers. Not only did global stocks recover from its -21.05% loss, it went on to make double digit gains.
A simple reminder though; investments do not automatically recover their losses in this manner. It is paramount that you invest in the right assets that have the power to recover losses and capture gains — typically a diversified global stock and bond portfolio.
Because of the nature of rolling returns performance calculations, the period you take performance measurements can give you drastically different results and is probably not the best way to judge whether you are meeting your goals. Below are some suggestions to keep in mind when reviewing performance data:
Look at discrete yearly returns and compare it to a broader index that is representative of the fund strategy.
Rolling returns can mask significant underperformance over discrete periods and over-emphasize outperformance.
Measure the returns vis-a-vis your goals. If your intention was to invest and save for the next 5, 10 or 20 years, then measuring your portfolio over much shorter timeframes such as monthly or annual statistics will not only be inaccurate but also potentially stressful.
If you are unsure whether your current mix of investments can help achieve your financial goals and these questions do not have immediately clear answers to you such as:
Will the losses on my investments recover?
How do I assess the performance of my portfolio objectively?
Is the manager that I hired for managing my investments going to get me to my destination?
Click here to schedule a 30-minute pre-discovery session where we can have a exploratory chat and help you with your concerns.