Category: Archive

Business Matters Keeping perspective important with mutual fund investments

February 16, 2011

By Staff Reporter

By Kevin FitsGerald

I have a number of different mutual funds. The amount I’m making on them seems very different. Can you help me figure and how well I’m doing? — PTR, Queens

When you want to evaluate your investment returns, what do you compare them to? Do you compare your returns to those of friends and neighbors, or maybe to random market indexes? If you do, you may be losing your performance perspective. To fairly evaluate your investment manager or a portfolio of investments, you and your financial advisor should determine how well they have performed in relation to:

€ your specific goals and objectives;

€ the general market environment and the specific market environment for the asset classes in which you are invested;

€ the performance of other managers/investments with similar investments objectives;

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€ the amount of risk taken to achieve your return.

Your goals and objectives

For many investors, the most important indicator of success is how well they meet their long-term goals. After all, what good is it if your portfolio’s return beats an arbitrary benchmark but is not in line with your long-term investment needs and tolerance for risk? Whether saving for retirement or for a child’s college education, the first step toward reaching your goals is to develop a financial plan against which your progress can be measured.

The stock market advanced over 21 percent in 1999, as measured by the Standard & Poor’s 500 (S&P 500) Index, but not all types of stocks participated equally. Large technology stocks (which have a larger impact on the S&P Index than smaller stocks), generally outperformed these smaller stocks. If your portfolio consisted of mostly smaller company stocks, the S&P 500 wouldn’t have been a good benchmark in evaluating your portfolio’s performance.

Investment styles, such as growth or value, are cyclical in nature and can outperform each other at different stages of a market cycle. In 1999, growth stocks generally outperformed their value-oriented counterparts (as measured by the Russell 1000-Growth Index vs. the Russell 1000 Value Index). However, U.S. stocks (as measured by the Dow Jones Industrial Average and the S&P 500) generally underperformed international stocks. There are many subcategories of these general investment styles that also should be considered. Therefore, one would not expect a small-company, growth-oriented manager to perform in line with a large-company, value-oriented manager.

Risks vs. return

In the financial industry, we generally define risk in terms of volatility of a portfolio’s returns over time. This is because the volatility of an investment’s returns will impact an investor’s ability to achieve his or her long-term financial goals. Historically, investors have been rewarded with higher long-term returns in exchange for assuming greater investment risk.

Conversely, less risky investments tend to provide a more predictable, but lower rate of return over time. Most investors fall somewhere in between, holding a blend of the various asset classes as they seek to participate in up markets while minimizing losses in down markets. The allocation of your assets will influence your investment returns.

Keeping track of investment performance is a critical step in any successful financial plan. But with so many variables to consider, investors often lose their long-term perspective and focus on one thing — short-term return. Losing the performance perspective can lead to misinformed investment decisions that make it more difficult to achieve long-term goals.

For more information on how you can keep your performance perspective, contact your financial advisor today.

The information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee its accuracy or completeness. Neither the information or any opinion expressed constitutes a solicitation for the purchase or sale of any security.

Kevin FitzGerald is first vice president-Investments at PaineWebber. He focuses on the areas of professional money management, asset allocation and retirement planning. He can be reached at 1 (800) 423-3381.

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