Risks and Rewards – Why Realism Pays in Managed Funds

Investors can be seduced by headline attractive return rates for some managed funds. A cool head and a longer term outlook are valuable assets when considering a managed fund investment.

Investment in a US technology fund may have been a great investment during the “Tech Bubble”. Until the bubble burst. Stock markets in general however, have been shown to have provided more attractive returns that other assets like property, over the longer term. One could then deduce that a managed fund that aims to replicate overall stock market performance is probably a pretty reliable long term prospect. This may not provide as high short term returns as certain “hot” sectors, and the funds that focus on them, but might outperform them over a longer timeframe, and most certainly with a lot less risk.

Stock markets both rise and fall. In a few good years, some funds might show consecutive years of 20% plus appreciation. These are above average returns. Such returns are much harder to replicate when markets are falling. If such returns continue even in falling markets, you should look at the results with a critical eye, lest undue risk is being taken with your money.

A fund manager that can reliably outperform the market and its peers, in both rising and falling markets is what most investors should be looking for! If they can do this over the longer term, then they are truly a fund manager to hold on to. Realistically, reduction in value of managed fund investments is to expected from time to time. Good fund managers that switch to capital preservation in such periods, or invest in companies that can weather such storms and come out stronger is the type of manager you want looking after your funds.

When viewing respective performances of various managed funds, it is worthwhile to view these figures against the stock market’s overall performance for the same period. Since many stock markets have rallied over 50% since the financial crisis low, most managed funds should be showing very healthy returns over this period. A fund boasting a 20% return during this timeframe is actually, comparatively, quite a poor performance. Conversely, a fund that declined 20% during the global financial crisis, where markets fell around 50% is actually a stellar result in very trying times. Such a fund would then have been better placed to participate in the subsequent market rally.

Don’t expect consistently huge returns, don’t take undue risk, pick a reliable fund manager and invest for the long term. Stock markets have been shown to outperform all other asset classes over the longer term. The investor that is satisfied so long as his managed fund(s) outperform cash, bonds or property is therefore unlikely to be disappointed over the longer term. Any returns over and above this are a bonus.

  • Sustainability of Returns
  • Levels of Risk
  • Proven Track Record
  • Managed Fund Performance vs Overall Market Performance
  • Outperformance vs Other Asset Classes

Share Trading contains risks, and does not guarantee profits. Having a realistic view of what performance one can reasonably expect from investment markets will assist in also making a more realistic decision with regards to managed fund choice.

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