Let's start with a simple question. Which of the following investors is having the most success?
- Investor A who invested £50,000 2 years ago and is up £4,218.
- Investor B who invested £50,000 5 years ago but is down £415
Based on the information above most people say Investor A has been more successful. But what I didn't tell you was that 5 years ago the market fell by 20% and stayed there until 2 years ago when it rallied 10% to date. So if you'd invested £50,000 2 years ago and your performance reflected the wider market you'd now have £55,000. Similarly if you'd invested £50,000 5 years ago your portfolio would be worth £44,000 if it had matched the performance of the market.
Suddenly it would appear Investor B has hugely outperformed the market while investor A has underperformed.
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