Relative dating verses absolute dating methods dating site datig site
Knowing whether a fund manager or broker is doing a good job can be a challenge for some investors.
In the paragraph above, the 2% we mentioned would be the absolute return.
If a mutual fund returned 8% last year, then that 8% would be its absolute return. Relative return, on the other hand, is the difference between the absolute return and the performance of the market (or other similar investments), which is gauged by a benchmark, or index, such as the S&P 500.
Relative return is the reason why a 2% return is bad in a bull market and good in a bear market.
(If you aren't familiar with indexes, read more on them in our tutorial).
Relative return is important because it is a way to measure the performance of actively managed funds, which should get a return greater than that of the market.
After all, you can always buy an index fund that has a low management expense ratio (MER) and will guarantee the market return.
If you're paying a manager to perform better than the market and the investment doesn't have a positive relative return over a long period of time, it may be worth your time shopping around for a new fund manager. You need to look at the relative return to see how an investment's return compares to other similar investments.
Once you have a comparable benchmark in which to measure your investment's return, you can then make a decision of whether your investment is doing well or poorly and act accordingly.
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