Points to know
- Checking your performance occasionally is fine, but don't get too hung up on short-term results.
- When you are looking at the performance of your funds, make sure you're comparing it against comparable benchmarks.
Financial management
Keeping performance in perspective
It can be hard to ignore changes in your balance and avoid comparing your performance with someone else's. But it can also be smart.
9 minute read
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Market
The trading of a universe of investments, based on factors like supply and demand. For example, the "stock market" refers to the trading of stocks.
Checking performance is OK, but don't get hung up on it
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 which 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.
Markets move—but here's why you shouldn't
It's 2009—the "Great Recession." Markets are in freefall. It's all everyone's talking about on the news, at the water cooler, and on the sidelines at your kid's soccer game.
It was a scary time for most investors, to be sure. But now that some time has passed, it's possible to get a little more perspective.
At the time, it was hard to see any silver linings between the storm clouds. In a matter of months, many investors lost significant portions of their life savings.
The "Great Recession" was a scary time in the stock market
This graph shows the month-end balances of a hypothetical $50,000 investment in the Standard & Poor's 500 Index between August 2007 and February 2009. Assumes reinvestment of earnings. Note that you can't invest directly in an index.
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The "Great Recession" was a scary time in the stock market
This graph shows that by the end of August 2008, an initial $50,000 investment in stocks in the S&P 500 Index made in August 2007 would have been worth about $44,400. By the end of February 2009, it would have been worth about $25,900.
But those same investors made it through the tough times to come out ahead—if they were able to leave their investments alone. Looking at the bigger picture, you can see that the Great Recession was a painful but ultimately temporary downturn.
Investors who held on through the recession regained all their losses (and then some)
This graph shows the month-end balances of a hypothetical $50,000 investment in the Standard & Poor's 500 Index between August 2007 and October 2015. Assumes reinvestment of earnings. Note that you can't invest directly in an index.
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Investors who held on through the recession regained all their losses (and then some)
This graph shows that a $50,000 investment in the stocks in the S&P 500 Index made in August 2007 would have been worth only about $25,900 by the end of February 2009. By the end of April 2011, it would have been worth about $50,200. And by the end of October 2015, it would have been worth about $84,200.
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Diversification
The strategy of investing in multiple asset classes and among many securities in an attempt to lower overall investment risk.
When it comes to investing, patience is a virtue
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.
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Portfolio
The sum total of your investments managed toward a specific goal.
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ETF (exchange-traded fund)
A type of investment with characteristics of both mutual funds and individual stocks. ETFs are professionally managed and typically diversified, like mutual funds, but they can be bought and sold at any point during the trading day using straightforward or sophisticated strategies.
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Index
An unmanaged group of securities whose overall performance is used as a benchmark. An index may be broad or focus on one sector or type of security.
The right way to compare fund performance
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.
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*Source: Donald G. Bennyhoff and Francis M. Kinniry Jr., 2016. Vanguard Advisor's Alpha®. Valley Forge, Pa.: The Vanguard Group.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
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