Thursday, April 7, 2011

don't swallow the "average returns" published by your fund

It's always nice to look at the annual reports of various investment funds. They are always printed in glossy paper and a lot of effort went into its publication, think graphics, etc. If you ask me, I'd rather have an ordinary looking report printed on ordinary paper, if that would mean considerable savings for the fund that will be translated to reduced account fees; ergo, more returns for us. Yes, we are paying fees and this eats into our returns, my friend. Anyway, the point of this blog entry is to tell you that numbers aren't always what they seem. Let's say the fund gained (+50%) in year 1 and lost (-30%) in year two. You invested 100 into the fund. How much do you have after 2 years. 110? Nope, you have exactly 105 after 2 years. Most people, in fact most funds will average the returns (50%+(-30%))/2years equals 10% average return. But that is not accurate. After year one, your investment is now worth 150 after a 50% return. After year 2, your 150 is now worth 105 after a 30% loss. So in reality your fund's performance is not a respectable 10%, but only 5% or about 2.3% return per annum. So when you see 13% average returns over 5 years published, don't be impressed right away. Moral of the story, evaluate your investments regularly, at least once a year and do your own math as to your actual returns, or loss for that matter. Happy investing!

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