When is the last time you assessed the financial health of your investments? You should, typically, assess your investments annually. All investments, even the medium to long-term investments, will benefit from annual assessments. They allow one to get a better picture of the investment performance and let you review your choices. Be careful though, frequent assessments can lead to switching, based on the short-term performance of your investment, which can lock in losses.
Consider these tips next time you perform a financial assessment:
Review your objectives
Your objectives will generally change as time progresses. Your changing needs may require you to find more appropriate investment options. As time wears on, you may find that you need to reallocate assets, draw an income or increase your savings.
Use personal benchmarks to compare performance
You must clearly define what your particular financial goals are and the return you expect. These personal benchmarks will help you identify important comparison points and will help you see whether your investment is satisfactory or not.
Assess performance against stated benchmarks
Each unit trust will have its own benchmarks. This allows you to evaluate its performance against its own stated goals. Evaluate the investment for a time period, which is appropriate for your goals and to the unit trust. Avoid looking solely at short-term performance.
Always assess a unit trust according to its stated mandate, which is defined by an investment manager in their fact sheets. A unit trust defined as low risk or defensive should not undergo large performance fluctuations. Additionally, a low-risk unit trust cannot be expected to yield the same returns as an equity unit trust.
Assess unit trusts against the market
Timing of the market is nearly impossible. It can, however, be useful assess the market state and make any decisions accordingly. Switching remains a huge risk, when assessing your investments. This can lead to selling/buying at the wrong time and locking in losses. Reading Investment or Financial news updates will help prepare you to make informed decisions regarding your investment choices.
Interpreting your returns
Percentage growth is a convenient measure for performing an assessment. This number can, however, be misleading since it doesn’t account for the risk the investment manager takes on to achieve the desired returns. Fluctuations associated with risky investments may cause you to panic and lead to switching. Always evaluate investments rationally.
Returns can be classified as unannualized (or cumulative) and annualized. Cumulative percentages show you how your investment has changed over a time period, while annualized percentages are reported as the yearly return over the time period.
Fluctuating investments in the short to medium-term may yield returns that do not always match what you require annually. What should concern you is the compound average and not the actual return for a given year.
This may seem a bit daunting, but you can always consult a good independent financial advisor to help you make sense of it all.
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