Investing Tips: Past Returns Don’t Always Translate into Future Returns
Even though looking at past returns is a very popular way to make investing decisions for a portfolio, it is not the only way. Indeed, you should be wary of basing an investment portfolio decision solely on past returns. Just because a company, commodity or fund has done well in the past, doesn’t mean that it will do well in the future. This is especially true if the investment is a relatively new one. Many growth investments have a phenomenal first year, only to turn in disappointing performances over time.
Looking at long-term average
When considering an investment for your portfolio, there are many factors to take into consideration. One of them could be a long-term average. One of the funds in my Roth IRA has a five year average of 11 percent in terms of returns. It goes up to 13 percent on the 15 year average. In the current market, I just try not to think about what the one year return is going to be.
If you are choosing an investment that has been around for a while, you want to look at the long term, rather than the short term. Has it shown consistent growth over time? Of course, even for those that show the longest term consistency can suddenly tank. Investing always carries risk.
Fundamentals
You should also look at the fundamentals of your investing decisions. Does the investment have solid management? Are the prospects favorable? Are there overall economic reasons to make the investment? If something changes dramatically in the fundamentals of an investment, you might consider get out. After all, it’s past performance won’t save it from poor performance in the future.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.
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