Many Happy Returns

At this time investors both professional and DIY analyse how one portfolio has fared against another. Often, the only number many investors consider is the performance number, for example Fred’s fund has returned 10% while Barney’s has returned 15%. Intuitively it may sound as though Barney’s has performed better, and this is where many DIY investors strike trouble.

To accurately analyse the portfolio performance we firstly need to consider what percentage of the portfolio was invested in what asset classes (cash, fixed interest, property, Australian & International shares). It’s this asset allocation decision which will have the biggest effect on returns and there is no point comparing apples with oranges.

Secondly, how much diversification within the asset classes was there? For example – Barney’s return of 15% may have been achieved by a single speculative investment which next year goes broke! Last financial year many DIY investors suffered this fate when attracted to slick marketing by property syndicates like Fincorp and Australian Capital Reserve.

Thirdly, what are the after tax returns of the portfolios? Fred may have achieved his 10% with a buy and hold approach while Barney traded madly throughout the year and incurred a large amount of capital gains within his 15%. If Barney’s in a high marginal tax rate, his after tax return may be less than Fred’s 10%.

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