Understanding investment performance realistically

Noura wants to know how to understand if her investments are on the right track. Are they doing well or should she worry about changing track. She has nothing to base a performance review on except what her friends talk about in terms of what returns they are making on their investments. Return on investment, or ROI, is the simplest way of understanding an investment’s performance. However, it is not as simple as putting in AED 100 and getting AED 120 in return.

What does investment performance measure?

A complete assessment of performance starts by understanding your goals and the risk profile reflected in the asset. The basic measure takes into account absolute returns, which mean exactly how much the investment has gained in the time period under review.

The second aspect it covers is related to a benchmark – meaning how your investment compares to what is the standard in the market. There are benchmarks that measure performance of various stocks. Measuring your shares against those lets you know whether your investment did well in that category or not.

Investments are also measured on the basis of risk. This assessment lets you know whether the return emerged from decisions with a higher risk, or were they weighed efficiently.

Short- or long-term

For serious investors, an asset’s performance is weighed over a longer time horizon. Striking it rich one time is not a measure of investment performance. Instead, investors with a longer view tend to take short-term fluctuations in their stride. In the longer term, these don’t matter. In fact, assessing short-term performance might be misleading. For example, if you have invested for a five-year time period, how your investment did in year one may not reflect how it will do in the next four.

Also, the effects of compounding on a portfolio’s performance can only be assessed over the long or medium term. 

Misleading comparisons

One of the biggest misconceptions about how your investment is going to perform is trying to predict future results based on past performance. Truth is, your investment will be judged in its own market and time.

Investors also need to take into account fees and charges. High investment fees can negatively affect your total return, even when the investment has done well. Take into account the fees and charges before you begin.

Get a specialist view: Work with your asset manager or advisor to assess the performance of your assets.