After you based on your risk profile and investment strategy has formed an idea of what kinds of funds your portfolio should contain, you can begin to pick out the best in each category. For many, the first step would be to look at the historical returns.
It can display the previous development, but reveals nothing about how the fund will perform in the future. It makes more sense to compare returns with competitors. Just be aware that a high return in a fund may be due to a higher risk exposure.
The so-called standard deviation is a parameter for risk. Slightly roughly translated it expresses the fluctuations in returns, and should therefore be taken into account.
The risk may also occur in the regions and sectors that the fund contains. Funds in the same category are far from uniform in structure. If you already have attributed the desired proportion of the assets to, for example, the Chinese market, you should be aware of the indirect exposure you expose yourself, through investment in a global fund.
Remember foreign assets
You should also be aware of the extent to which your personal finances are dependent on the overall economy, for example in the form of housing prices, employment and prices. So you might consider if you want the portfolio to contain too many domestic assets.
Once you have reduced the choice to a few funds, it may make sense to compare costs. Actively managed funds that try to beat the market are usually more expensive than the passively managed - the so-called index funds - whose purpose it is to follow the market. But the extra cost is not always justified.
Studies show that on average you will achieve a higher return by choosing mutual funds with the lowest cost. If you choose the cheaper index funds, you'll miss the potential returns, active funds can generate, but since it is difficult to figure out the market, you also avoid the bad, expensive funds.
It would be near impossible for the private investor to select the best funds, since it is not enough to look at historical returns. Looking at actively managed funds, there are more that are performing poorly, than there is doing well. The probability is therefore that you choose a bad fund.
Private investors should seek professional advice, for example in banks, which are better placed to assess what funds are going to do best.
If you still want as a private investor to choose, it is recommended to go for index funds.
- It is near impossible to find tomorrow's winners. Make sure instead to avoid the worst funds, and you'll be well on its way
- Lose yourself not in the historical returns. It is no guarantee of future performance
- Get inspiration from the banks advice, but be aware that banks can only offer the products they get paid to have on the shelf
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