Financial Focus
When evaluating investments’ performance, avoid common mistakes
As an investor, you might think
it’s easy to evaluate your invest- ments’ performance. After all, the bigger the gain, the better, right? Tis statement is true enough, but as an investment strategy, it’s incomplete — and, if followed rigidly, it could lead you to make some mistakes that could hinder your progress toward your finan- cial goals. What are some of these poten-
tial mistakes? Here are a few to consider: • Evaluating performance over a
short period of time — If you mea- sure an investment’s performance over a relatively short period of time, you may be more tempted to invest emotionally — that is, you’ll buy more shares of an invest- ment when you “feel good” about it because its price has risen, and you’ll sell more shares when you
Barnardsville Spring sheep
“feel bad” because the investment’s price has fallen. Tis behavior is the opposite of the classic piece of investment advice: “Buy low and sell high.” Try not to make invest- ment decisions based on short- term performance. Instead, look at an investment’s long-term track record. While it’s true, as you have no doubt heard, that “past per- formance can’t guarantee future results,” it’s nonetheless useful to see how an investment has fared in different market environments. • Neglecting the impact of con-
tributions and withdrawals — If you put more money into an in- vestment, it will be worth more — until the price drops — and if you take money out of an investment, it will be worth less — until the price rises. Yet many people mis- takenly attribute their investments’ performance to these inflows and
outflows. • Failing to distinguish between
“growth” and “income” invest- ments — To help achieve your long-term goals, you’ll need a mix of growth-oriented investments, such as stocks, and income-pro- ducing vehicles, such as bonds. However, bonds will typically not add much growth to your overall portfolio, so keep this in mind when you look at the year-to-year change in value on your invest- ment statements. • Maintaining unrealistic ex-
pectations — In 2009, the Dow Jones Industrial Average rose nearly 19%, while the S&P 500 jumped more than 23%. But if you anticipate such unusually high returns annually, and you base your investment strategy on them, you’ll likely be disappointed and have trouble meeting your goals. For a variety of reasons, most in- vestment experts foresee relatively modest returns in the financial markets over the next few years, so you’ll want to plan accordingly. • Comparing investments to benchmarks — Try not
to com-
pare the performance of your in- vestments to benchmarks such as the Dow Jones Industrial Average or the S&P 500. If you’ve chosen an aggressive investment mix, your returns may show wide swings, beating the benchmarks substan- tially in some years while trailing them significantly in others. On the other hand, if you’re a conser- vative investor, your returns may consistently lag the major bench- marks, but you’ll probably experi- ence less volatility. Once you know what to expect
from your investments, you’ll be less likely to be disappointed at your returns — and you’ll be bet- ter prepared to create and follow an investment strategy that works for you.
Tis article was written by Ed-
Always a sign of spring, several of Justin Dillingham’s sheep frolic around in Barnardsville. Photo by Melinda Stuart.
ward Jones for use by Bill Bough- ton, Weaverville’s local Edward Jones Financial Advisor.
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