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Financial Literacy

Financial Literacy

Home Financial Literacy Investing 101 Judging Performance of an Index Fund

Judging Performance of an Index Fund

“Everything’s relative”. Sorta. In general, the “How well am I doing?” conversation starts (and sometimes ends) with how well the market is doing. If you were up 10% in 2008, you were a hero. If you were up only 10% in 1998, you were a goat. Over time, the stock (equity) market goes up. But someone entering the markets in 1998 would think that the market “never” goes up as it has been flat now for the last 15ish years if you ignore dividends. (You shouldn’t but this is just to illustrate a point) The time horizon of your investing cycle is arguably the most important element in the decision tree you’ll climb and build a house in. If you are investing for a long horizon – decades – then you can afford to take relatively a lot of risk – buy small cap funds – they are more volatile but small companies tend to grow faster than large ones. If you can live with being up and down a lot in a given year, then go for it. Alternatively if you are 3 years to retirement, you can’t live with the ups and downs - check out muni bond funds etc.

Key to determining how “well” you are doing is to understand what market you are in – if it’s the bond market, then you have to compare your ups and downs to that world; if it’s high growth equities, then a different set of components. Apples should not be compared with kumquats.

1 year, 10 year return
Balanced Index 5.1%, 2.2%
Total Stock 3.0, -1.1
Social Index 2.2, -4.4
Asset Allocation 8.3., .6
Emerging Market 16.8, 11.2%

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