[MUSIC] Hi there. In this video, we're going to have a look at some common mistakes you will no longer make once you've completed the course. And here I want to emphasize two, and they both deal with performance and what we do with it. I'm encounter this mistake quite often when I talk to investors. The first one deals with the fact that we tend to get pleased, to satisfy ourselves with just one number, generally, at the bottom end of the reporting of our bank accounts. And the number may say you're up 6% year-to-date. If you look at it like this, you say, wow, 6% since the beginning of the year, that's quite positive news, right? Then you sit and think about this for a minute, and you say okay, 6% a year-to-date but clearly, it makes a difference if we are early February, or if we are late November. So, that's the first obvious question that you should ask yourself to basically mitigate this 6% year-to-date. What does it mean really? Where are we in the year? Is that still positive news? But more importantly, what is the annual equivalent of that 6%? The next question you should ask yourself, if you've been having this account for many years, is how does that 6% compare with the previous years? So, are we above trend? Are we below trend? Is it something that really stands out? Or is purely in the average? Or possibly even below the average, okay? So not just look at one number but put that number in relation with a time trend. Okay, next and foremost, we need to compare this absolute number, the 6% number or whatever number, to some kind of yardstick, to some kind of measure which we can use as a norm and decide on whether that 6% is good or not so good. And here we have various possibilities we need, but we need to think of a benchmark. One common mistake I found is that, for instance, an individual, an investor, who has his portfolio which is invested globally, say, in European equities, in US equities, in equities from emerging markets, and so forth. But he has, say, the euro as reference and he lives in France. He lives in Paris. That he will compare himself to the [FOREIGN] which is the equity market index of the French stock markets, okay? But this is not very relevant because maybe the allocation to French equities in his portfolio is a mere 2%. And maybe the [FOREIGN] has been going up by 40%, in which case, he comes to his banker or his advisors and says what are you doing, 6%? The [FOREIGN] was up 40% this year. To which case, you have to mitigate the 40% and say French equities only account for 2% of your portfolio, okay? But more generally, what we should be comparing this number to, the 6% or whatever number, is to some kind of market index. So this can be an equity index, if we're talking about 100% equity portfolio, or a bond index, if it's a bond portfolio or a combination of both. So an index which combines equities and bonds by using the weights of your strategic asset allocation, you remember strategic, not tactical asset allocation. What else can you compare yourself to? Well, you can compare yourself to the competitions, there are indices, especially in the hedge fund sector, where you basically compare the performance of that of the competition. So in this case, if you pick a fund of fund, a fund of hedge funds, or you pick even a single hedge fund, then you may compare the performance to that of the peers, to that of the competition. Also, it's very important to compare that 6%, that absolute number, to the risk-free return. 6% may look good, but what about if the risk-free return on a savings deposit is something like 5.5%? Maybe that 6% does not look that good anymore, especially if that 6% has been achieved with, and that's the last point, huge risk. So if the manager takes huge risk and he's only rewarded, and we'll see how we can measure this in this course, only rewards you by an extra 50 basis points i.e., 0.5% from 5.5 to 6% but taking huge risk? You may not be very happy, because okay, that huge risk delivered some positive return, but very tiny in relation to the risk which was taken. So risk-free, again, if it's high, the 6% may not do that good. So again, it is very important to compare a single return performance number to some kind of norm, to decide whether it looks good. Is it really good as it seems? In the next video, we're going to have a look at another mistake, which I encounter also very often. [MUSIC]