Investment returns

Common Pitfalls of Comparing Investment Returns

Common Pitfalls of Comparing Investment Returns

I hear it all the time.  Having lunch with a friend, “My portfolio is up 15%” or from a friend at another financial firm, “Our portfolios are up 10%”.  My initial reaction is to do a quick back of the napkin comparison.  Reality sets in and I start asking questions to better understand what they are talking about.  What I realize is they are quoting raw returns.  The raw return is the return over a past time period (such as 6 months, 1 year, etc.), without adjusting for risk.   Looking at only the raw return can twist your perceptions about how your portfolio is performing and lead you to bad choices – i.e. taking on more risk or flip-flopping from one investment strategy to another.