Most of us would agree that in determining which investment products are suitable for us, we look at their track records. In this example, let’s use mutual funds as an illustration.
First, we should remember that what happened in the past is no indicator of what’s going to happen in the future.
I’ve read about this a few times and I’ve experienced this phenomenon myself as well. Usually, what’s at the top of the ladder this year might not perform so well next year. Though this could be wrong, it is actually what generally happens.
For example, last year in Australia, Listed Property Trusts (LPTs) were some of the best performers in the stock market. This year however, they’re not doing so well.
No funds can sustain high returns every single year. Earning 80% returns per annum is not sustainable. The markets might perform really well during a bull market but under-perform during a bear market. Even for the world’s best investors like Warren Buffett and John Templeton. Over time, the returns of their investments averaged at around 14% to 32%. This assumes that the fund is not using any leverage whatsoever.
So, don’t get too hyped up when your unit trust consultants, your friends, or anybody else, tell you to get into a mutual fund just because they had recorded 80% rate of return per annum. This is not to say that these funds are bad investments, it’s just that you need to exercise caution. You need to do your research a bit further. Know what the fund is investing in and what is their investing style.
One more thing, usually, one year track record is not really a good indicator. It might be a bit biased because of the recent bull run in the market. What’s best to look at is how the fund has performed over the years. Look at the rolling return or in other words, look at its average return over 3 years, 5 years, or even longer. A fund could record a return of 80% last year but its rolling return over 10 years could be only 10%.
All in all, do your research well. Understand what you’re doing.
Knowledge is key.
P.S. This post is not aimed to discredit anybody at all.