You must be knowing that mutual funds and various similar types of investments produce their annual reports. And when you look at the various investment choices in your prescribed 401(k) plan, then you can able to see and read each of their annual reports. And then you will also come to know and read their three years, five years and ten years annual reports. Here were will see how you can make sure that annual rates of returns don't deceive you.
Understanding Annual Rates of Return
You should have your basics clear while reading those annual reports as annual reports can certainly deceive you. Most of the time investors use to study the annual reports of every company of the last year before deciding to invest in it and unusual what happens is that they use to invest in those companies whose annual reports look good and satisfying.
But let me tell you this is a very wrong way to make any investment decision, as you should understand that the returns may be great in past year but that does not give you the guarantee that the returns will repeat themselves and in many cases, they are very horrible.
So, while investing only relying on annual returns is not the very appreciable method. You should need to understand and study various other factors related to those companies and always try to have a high-quality investment. But always keep in mind nobody is going to predict the exact future of the mutual funds, bonds, etc.
Peeping Into Annualized Rates of Returns
Annual rates of returns will only be going to show the performance of past one year. And in the same way, an annualized rate of returns will show you the average return that was achieved during the past number of years. And when you start studying this annualized rate of returns of various companies you should be very careful as they are going to cancel out the ups and downs during those years.
If any fund is having 35 percent of returns in ten years, but when you study a few years like in the first year if the return is 3 percent, second year 6 percent and in third year if it is 11 percent then the annualized returns for the three years will be 10 percent and in this way it is very deceiving.
Many funds you will find have good annualized returns, but this will not give any information about how it will perform the following year.
The stock fund usually delivers high returns as compared to bonds over a longer period, and if you go through the annualized returns for these funds for over ten periods of time duration, then you will find that these funds have higher returns as compared with bonds.
But in reality, funds are prone to have a year with a negative annual return in comparison with bonds.
So you to understand the annual returns in a realistic way and develop expectations accordingly. You need to understand what investment exactly is. It is all time-dependent basically, and over a short period, it may be possible that a particular short period bond may exhibit very different characteristics.
But still, in some cases, it is found that annual return reports have some importance as giving the identical returns in the following years.
Then what Should You Look For
You should always consider your investments matching your goals rather than picking up the investments as per their annual returns. Let's say for example in your younger days you are investing in your 401(k) plan or an IRA, then you would wish to have long-term returns on your investments, and long-term means you would like to enjoy the returns in next 25-30 years.
In this situation, last year's annual report for the returns or the next year of their annual year return report will don't have any of use to you as you have invested for the particular time frame.
Here what matters and relevant to you is what will be your returns in next 25-30 years as per your investment type. And here the answer will be the index funds which will invest in small caps and value stocks. As said earlier no one will guarantee what the returns these will generate over the longer period, but it is proven that long-term investments yield good returns.
Have some Targets While Investing
Please do some research; you will find the professional investors do not make their decision on investing as per annual reports, which can be very high past year. They usually build their portfolio model which says how much money they can invest in each type of model. They usually divide their funds into various investments models and in this way they are at lower risk of loss.
In case you are new into this, then there are many automated ways you will find to apply in your 401(k). Most of the times 401(k) funds offer target dates and you can pick among them to satisfy your retirement needs. These funds will automatically invest in various categories and also change investment mix across the time.
Another option which you can opt for is a balanced fund which maintains a balance between stocks and funds. You can also take help of the questionnaires and tools which 401(k) will guide you automatically to the best-suited portfolio for you and the funds you should select when you answer few particular questions.
You can rely on these types of target date funds, balanced funds and model portfolios as they will have a balanced annual returns reports and provide you with the blended results of the all underlying investments which they own. So you will most likely not to have results in terms of lowest or highest annual returns report and which is a good thing. try using model way as professionals do and this is the smartest way to do the investments.
If still you need any financial advice or help you can always hire a financial advisor or you yourself can go through the basics of investments and do the research online and can read books related to smart investments.