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Investments bring a few ideas in the mind. For instance the amount of capital required as well as the return on the same. A more concerned investor will research and try to factor in the time period involved as well as the comparative options. The common approach for the average investor is to look at past performances. However, the age old financial investment adage of not heeding past performances alone does hold good.
What:
The issue with investments is that one often invests looking at what has already been achieved alone. However, the investment is for future returns. Hence, factors like expected future inflation and cost of living hikes as compared to those when he past returns were earned need to be factored in. There has been a certain manner in which the economic situations of the past have been faced by the fund. However, a true reflection of what will be the probable performance in the future based on careful analysis of multiple parameters becomes essential.
Why:
The commonly observed phenomena is that very few funds which were at the top or are rarely remain maintain the slot over long term. However, past indicators can be dynamically analysed so as to provide a glimpse into the probable future showing from the fund. For instance:
Past indicators can be misleading since the market conditions such as a bull trend may no longer be prevalent. A bull trend will mean higher returns for increased risky investments. However, the same is not reasonable in a risky bearish environment. Compounded annual growth rate or CAGR hides the periods of poor performance as it provided the overall return. Hence, it does not provide a good basis for selection. Hence, projected financials, risk appetite and risk return ratio provide better basis for judgement to an investor in the long run.
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