December 19, 2013

2013' Japan's +40% growth was short or enough!? -Completely different game:index vs. active investment-

This year, stock price of Japan market increased more than 40%. (+45% for Nikkei 225/+40% for TOPIX in 2013)

When I was looking back my portfolio and its performance for this year, one question came up to me; did I do well this year or not!?

This is not always an easy question to answer. For some people, it may be easy, but it could become a difficult question for those who do invest on index funds.

For an active fund, evaluation of the performance is relatively simple because generally an appropriate market-index can be set for the purpose of comparison. Because the base for comparison is given, active fund can be always evaluated in relative manner.

However, index fund is different. Index fund itself reflects the market up-down, and the performance cannot be measured in relative to a certain index.

Imagine, if you invest fully on TOPIX, and enjoyed +40% gain this year, you may feel happier than previous year. And, suppose next year, if the annual increase became less and ended up with, let's say, +20%, some may still feel satisfied with the increase of +20%. However, other investors may feel disappointed for the decrease from +40 to +20%. For index investment, the judgement is all up to individual.

It tells us one thing. If you want to evaluate periodically whether asset investment has been successful, you have to set a goal, for example, annual rate of return. Especially this is important for those who do invest mainly on index funds. The goal setting varies person to person, family to family, depending on family status, life stage, income level, risk profile etc.,

It is a substantial difference between index and active investment whether a goal is something given or something to be created. Active investment is a win or lose game which has a pre-set opponent even before the game starts. On the other hand, index investment is a game which starts only when investor creates a target. In other words, active investment can be evaluated clearly and objectively in comparison with benchmark, but index investment is judged only subjectively with a self-set goal.

For me, as an investor who mainly relies on index funds with less ambitious target, it is no doubt that this year's performance was way above my expectation and I want to thank this year for the over achievement.

No matter how economists predict the market scenario for next year; further growth, booming bubble or market slowdown and how actually the market changes, it would probably not affect the way how I measure the portfolio performance. Rate of return in absolute value is always the primary important indicator for the outcome of my portfolio.

If by any chance, market goes behind the target, we as a long-term investor, it's not the time for crying but the time to seek buy opportunity and aim more growth in future.