Why absolute returns matter in investment
Financial objectives are not sympathetic to the plight of investment markets
Investing is not a sport. The vast majority of individuals invest for a goal, such as providing a deposit for a house, paying for a child’s education or being able to retire in comfort. But these financial commitments bear no relation to the short- or long-term performance of a market index. The advent of indices made investment markets more transparent and brought about an increased level of accountability for those tasked with managing money. Investors were given a source of reliable information – a benchmark against which to measure the performance of their money managers. But, by using these measures, investors began to focus on beating the index rather than earning appropriate returns to meet their financial needs. This in turn resulted in the adoption of a relative-risk mindset at the expense of absolute risk, and has contributed to the often inappropriate use of passive strategies. Many investors appreciate that a market index bears little resemblance to their financial goal...
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.
Subscribe now to unlock this article.
Support BusinessLIVE’s award-winning journalism for R129 per month (digital access only).
There’s never been a more important time to support independent journalism in SA. Our subscription packages now offer an ad-free experience for readers.
Cancel anytime.
Questions? Email helpdesk@businesslive.co.za or call 0860 52 52 00. Got a subscription voucher? Redeem it now.