Short of something unexpected happening, returns moving forward on investments will not be in the double digit territory.
The way the markets and interest rates have been lately means lower returns will certainly be the norm.
These returns can be analysed using “return” and “standard deviation” (SD).
In simplistic terms, standard deviation provides a risk measurement of how a particular investment has performed over a particular period of time compared to others.
To give you a simple example, a fund that has returned 1% each month over 24 months has a SD of 0. But so too has a fund that returned -1% every month over 24 months.
To contrast this, another investment fluctuates from month to month. One month it might be up 5% then down 10% and then back up 7%. This fluctuation gives you a measure – standard deviation. It provides a precise risk measurement of how varied an investment return has been over a particular time frame both on the upside and the downside.
Depending on where you sit on this the standard deviation parameter will define if you are calibrated for low or high risk (with returns usually reflective of this).
But rather than choosing one investment measure, evaluate the investment you have across a ‘large group’ of investments that are alike, e.g. shares funds to see where your share fund is in relation to the SD of other funds.
Looking over a long period of time gives you an average return, but more importantly the median risk (SD) your fund achieved.
See the following example.
Investment B is superior as it has a higher return 9% (Y axis) with lower volatility (standard deviation of 10% – X axis). C is the worst 4.5% return and a SD of 13+%.
Table 1. One year performance – each asset class performing similarly. But the SDs for each of these is quite different. Return not rewarding risk.
3 year performance. The variation in SDs is giving reward as the high SDs asset class (shares & property) performing better. Return is rewarding risk.
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