One of the interesting dynamics of investment is the concept of buying and holding for the long-term. It's very often this dynamic that most affects your absolute performance or real return, net of fees, over a specific period.
Take the S&P500 for example. Had you bought the index ie: it's constituent stocks, in January 2006 you would have paid 1300 or so 'for' the index. Today the index trades at 1145 approximately. Your real return, excluding dividend income, if any, would have been a real loss of 11% over the five years. Compounding the loss, realised or otherwise, is the concept of opportunity cost ie: the return you could have made in an alternative investment. Too many investors make the error of accepting a benchmark against which portfolio performance is measured which is too close in asset class to their own investment. Using the S&P500 as the example; had you accepted an annual benchmark of S&P +1% against which to 'measure performance' and your equity portfolio performed accordingly, you still would have lost money over the 5-year period. Even so, your financial manager would have 'out-performed' according to the mandate and would be entitled to charge a performance fee.
By the way if you think this doesn't affect you, where do you think your pension is invested?
No comments:
Post a Comment