Apples to apples? Investment performance is not a simple comparison

By David Baruffi*

It is human nature to try to synthesize information down to one identifiable figure that we can use to assess and compare against. Be it how hot it has been today verses yesterday, how much rain we have received this year verses last, or what returns our investments have produced verses other investments.

However; simple comparisons belie complex mathematics and you can rarely make meaning from simple comparisons.

Generally, investors look at things through a bottom line approach: “what have my funds returned?”  “I can only spend returns that can be transferred into cash.” The analogy is often along the lines of – if they invest $100 and it grows to $110 then they have made $10 which can be spent. The comparison they make is if investment A made $10 and Investment B made $11 then B is better than A.

Through the lens of a Professional Investor

Professional investors look at comparisons differently.  They are aware that all investment markets go up and down and they measure their performance against a benchmark. They are also aware investing in different mixes of investments carries different risks and rewards. Therefore they want to compare each investment with a ‘like for like’ investment. This is difficult as there are many different investment mixes in the market place and without a good benchmark to use comparisons can be misleading.

For an investment manager it is about how you have performed against a benchmark. So if the benchmark returns are 10% and you have achieved 8% then you are below the mark, if you have achieved 12% you are above the mark.

In 2003 I invested a client’s funds into a Guaranteed Lifetime Annuity. When the Global Financial Crisis (GFC) hit in 2008 the client’s funds were guaranteed and he kept being paid the annuity irrespective of the market turmoil. When discussing the investment with him in 2012 he had concerns about the rate of return which was around 4.5%.  As a professional investment advisor I was satisfied with the rate of return as the average balanced fund had lost 24% over the same time period. Therefore we had outperformed the benchmark by 28%. Only after he had talked to some friends who had lost money over that time period did he appreciate the returns.

In the world of professional investors there are a number of measures used to compare the performance of investments. The science of Investment Measurement Performance is relatively new but is being widely adopted to enable professional investors to breakdown investment performance to establish if the investment manager was good or lucky. Further analysis can be undertaken to see where the investment performance has come from and at what level of risk was undertaken to achieve that performance.

While there are Global Investment Performance Standards that investment firms can follow to provide investors the transparency when comparing investment managers, not all investment managers operate to these standards. (See the CFA Institute website for more information on this topic).

So when reviewing your investments it is important to be aware there are many different ways of comparing investments and it is not easy to achieve an apples to apples comparison.

At Blueprint Wealth, we offer financial advice that is right for you, no matter what stage of life you are at. Contact us to set up a plan that is right for you.

*David Baruffi is an Authorised Representative of AMP Financial Planning Pty Ltd, ABN 89 051 208 327, AFS Licence No. 232706. Blueprint Planning Pty Ltd (ABN 78 097 264 554), trading as Blueprint Wealth, is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Ltd, Australian Financial Services Licensee and Australian Credit Licensee.


This article contains information that is general in nature and does not take into account your objectives, financial situation or needs. Therefore, before making any decision, you should consider the appropriateness of the advice in regards to those matters.