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If you think you are in the wrong unit trust because your fund has not performed to your expectations, it may be that you backed yesterday’s winner.

Unfortunately this could be due to bad investment advice. Numerous brokers, that also give investment advice would give investment advice by only doing performance comparisons of historic performances of funds or maybe specific sectors. Based on historical performance you then make an investment with your hard earned savings, just to be disappointed in the returns.

The most dangerous investment advice is to create an expectation with that historical performance is indicative of future performance.

Past performance is only one of the many criteria that you should look at when making investment decisions. Investors are far too quick to forget the principles of portfolio construction as they rush headfirst into the latest flavour of the month, or yesterday’s top performers.

Portfolio construction is very important when investing in unit trusts, and before you make any investment you should make sure that sufficient strategic research has was done in the following areas.

  1. Asset allocation – This is the specific blend between investing in equities, bonds, cash and property markets. Your risk profile is a key driver behind your specific asset allocation. The higher your risk profile, the greater your exposure to equities should be.
  2. Correlation of funds – Correlation is a measure of how investments movein relation to one another and when. Under what is known as modern portfolio theory, you can reduce the overall risk in an investment portfolio and even boost your overall returns by investing in asset combinations that are not correlated. Therefore it is critical during fund selection to make sure that the funds are not correlated to each other.
  3. Drawdowns – Drawdowns are a measure of downside volatility and are very important for measuring the historical risk of different investments, comparing fund performance, or monitoring personal trading performance.

There is much more to an investment decision than historical performance. Make sure you get specialist advice when making your decision.

Heinrich Coomans | CA(SA) | CFP ®   is a director at Affluence Group and specialises in Investments, Personal and Business Insurance. For any questions please contact him at or 084 586 9509