One year is a snapshot
One-year performance tells you what happened recently. It can be useful, but it is only a snapshot. A fund may look excellent over one year because its style happened to suit the latest market conditions.
Five-year performance gives more context. It shows how the fund behaved through more than one short market phase. That can help you see whether the fund has been consistently strong or whether one exceptional year is doing most of the work.
Neither number should be used alone. One-year performance can show momentum or recent weakness. Five-year performance can show consistency, but it can still hide periods of discomfort along the way. The best approach is to compare several time periods together.
You should also compare performance with risk. A fund with a higher five-year return may have taken much more risk to get there. Another fund may have produced lower returns but with a smoother journey. Which is better depends on what you need.
A balanced approach
Use one-year, three-year and five-year returns as different parts of the same story.
- One year shows recent market experience.
- Three years gives a medium-term view.
- Five years helps reveal consistency.
- Risk and asset mix explain the numbers.