Allan Gray published an article, “The variability of unit trust returns” which we think you will find interesting. The full article is on our website (click here), but for our convenience we have summarised it below:
- Many factors need to be considered before selecting the most suitable unit trust.
- First, clarify your goals, time horizon and risk tolerance.
- Invest long-term and try to ignore short term fluctuations in order to enjoy the full benefits.
- Do not try to time the market, disinvesting after making a loss will lock in your losses.
- Switching too often is the reason many investors achieve lower returns than the funds in which they are invested.
- To determine how much fluctuation you can expect, look at the variability of returns over time (divergence from the average return over a period).
- Funds with more equity exposure will have more variable returns.
- Looking at a fund’s range of returns can give you an indication of best and worst case scenarios.
- Although short term variability of equity funds can be dramatic, their long term returns are generally far superior.
- Balanced funds aim to create long-term wealth more steadily, by taking on less risk of market fluctuation and capital loss than an equity fund.
- The Balanced Fund’s variability is still much higher than that of the Money Market Fund, which aims to preserve capital and maintain liquidity, with very low risk of loss and the lowest variability of the Allan Gray funds over any period.
- Ultimately you need to make sure that your fund’s objective, long-term return potential and the level of fluctuation you can expect marry up with the level of risk, and variation in returns, you are comfortable taking on.