Keeping investment performance in perspective

Most people understand that money they've invested isn't going to just sit there. Some days they'll have more money, some days less.

But when you see the market  racing upward or crashing down and everyone else seems to be frantically reacting, it can be hard to accept that the prudent reaction is to just stick with your plan.

Remember that any strategy that involves predicting the future—whether it's knowing when to jump in and out of the market completely, or knowing which investments are next year's big winners—is unlikely to succeed for very long.

Consider this: Professional traders have access to detailed information about specific companies and industries, and many of them work with computer algorithms that can react to market movements in milliseconds.

But even they can't be sure what tomorrow will bring.

In the end, the thing that matters most to you is likely to be whether you met your investment goal or not. So focus on the progress you're making toward it, not what everyone else is doing. Remember that risk, reward, and time all play a part in your investment’s performance.

During the “Great Recession” in 2009, markets were in freefall and it was all anyone was talking about. It was a scary time for investors, but now that some time has passed, there’s more perspective. 

At the time, many investors lost significant portions of their life savings.

Even investors who can tune out market noise sometimes find it hard to avoid tinkering with a portfolio that doesn't seem to be growing as anticipated.

It makes sense—with most other products you purchase, you're right to be concerned if there are immediate issues. A car or an appliance that doesn't work the way you expected isn't likely to improve unless you fix it.

But investments aren't like other purchases. You should expect that some will do well, while others might take some time. That's why diversification is so important.

There's been extensive research showing that investors can't anticipate which specific market segments will perform well in the future. And investors who try are actually more likely to experience lower returns.

Is there a way to tell if a fund is doing what it's supposed to be doing? Yes. All mutual funds and ETFs (exchange-traded funds) have a specified benchmark for you to compare against.

If your fund is an index fund, its benchmark will be the index that the fund tracks. But remember that an index itself doesn't have any costs, so an index fund will almost always lag the benchmark a little bit. If it's off by any more than the fund's expenses, it's worth asking why.

If your fund is an active fund, the fund manager will identify the most appropriate benchmark that the fund is trying to beat. If an active fund consistently lags its benchmark, that's a sign that you may want to look for a similar but more successful fund.

Mutual funds and ETFs are also assigned to peer groups by fund rating companies like Lipper. By comparing your fund's performance with that of its peer group (for example, U.S. growth funds), you can see whether there's a valid reason for concern.