Investors are often confused when a portfolio with an excellent return over one year could have a poor return since the inception of the investment. In line with this certain funds may have stellar returns over 1, 3 and 5 years in one month and only a few months later indicate a dismal performance over the same periods.
While this could be the result of fluctuating performance at the end of the period being measured it could just as easily be the result of volatility at the start. This is an important consideration for portfolios which started just prior to the 2008 financial crisis. The graph below indicates the performance of All Share Index from the start of 2006 up to 26 July 2012.
While the markets have experienced a rather wild ride over the indicated period the extreme crash during 2008 has meant that portfolios which started just prior to the crash will most likely have poor performances since inception and wonderful performances when measured over shorter periods.
When measuring form the peak of the market on 19 May 2008 up to 26 July 2012 the All Share Index has only gained 16.35%. In contrast when we measure from the bottom of the market on 20 November 2008 up to 26 July 2012 the All Share has gained 112.65%. On an annualised basis this translates into returns of 3.68% and 22.64% respectively.
It is thus important when measuring the performance of one’s portfolio to measure it relative to appropriate benchmarks and indices over the same periods. This is why Ternary always includes the performance of the All Share Index, the All Bond Index, the Money Market Index and inflation when reporting investment returns to our clients. It is only when measuring the relative performance of a portfolio over time that one can draw a meaningful conclusion as to the performance of a portfolio.
