When it comes to investing and growing your wealth, there is no shortage of financial products available in the market. We can choose to invest in almost anything under the sun: properties, company stocks, Real Estate Investment Trusts (REITs), exchange traded funds (ETFs), bonds, peer-to-peer lending, commodities, unit trusts, investment-linked plans and even cryptocurrencies.
Most retail investors would be excited to start our investing journey and seeing our returns roll in. However, we have to realise that this is only the beginning of our work as an investor. We have to continuously pick up knowledge and regularly review our investment portfolio – say at the end of the year or every six months.
This will equip us with the information to understand how our investments are performing as well as why they are doing well or badly. With this information, we can improve and rebalance our portfolio.
We highlight four things you should be looking out for when you review your portfolio.
How much an investment yields is definitely one measure that matters for many investors. Investment yields can be especially significant those who are close to, or are already in, retirement as they depend on it for passive income to pay for their day-to-day expenses.
Yields are usually expressed as a percentage and are typically computed yearly. We are able to compute it quite simply:
[amount paid out] / cost of investment X 100%
Investments that tend to deliver consistent yields include certain blue-chip companies, REITs and bonds. The [amount paid out in a year] looks a little rudimentary in our formula as it simplifies all types of income derived from your investments.
This may include rents from properties, dividends from equities, interest from fixed deposits, dividend from equities, distributions from REITs, ETFs and unit trusts, coupon payments from bonds and other debt instruments as well as any payouts from investment-linked plans.
In today’s low interest rate environment, safe investments that are able to consistently pay out good yields of over 4% are in high demand.
#2 Total Returns
Total returns is usually considered a more accurate computation for how well your investment is performing. This is because it includes not just the investment yields but any capital gains as well.
Total returns are also commonly expressed in terms of a percentage and computed yearly. The formula for this is also relatively simple:
[capital gains + amount paid out] / cost of investment X 100%
What this means is that if our investment property had appreciated in value, it takes that increase into its calculation as well – expressed as [capital gains] in the calculation above. This is different to only taking into account the rents it pays us – expressed as [amount paid out].
This works similarly for equities, REITs, ETFs, unit trusts, bonds and investment-linked plans that may increase in value. In addition, this can also be used to calculate returns for some types of investment that don’t usually pay out any income – typically commodities or cryptocurrencies, but also growth stocks that don’t usually pay any dividends.
#3 Portfolio Returns
We’ve added this in here because conceptually, it’s slightly different to total returns of a single investment. Think about a scenario where a single investment in your portfolio delivers 50% returns but your portfolio, as a whole, delivers 5% only. In this scenario, you should stick to it rather than shift all your money into that one investment.
This is because your portfolio, as a combination of all your investments, protects you from idiosyncratic risks – which is to say the risk of a single investment which may be adversely affected by its management, its industry, its operational location or even asset class. Now imagine a similar scenario where a single investment in your portfolio delivers a negative 50% return but your portfolio, as a whole, delivers 5%. In this scenario, you’d be really glad you diversified your investments.
At the end of the day, your portfolio returns matter a lot more to your long-term accumulation of wealth than any single investment you make. And this is why you should pay particular attention to it.
#4 Benchmark Returns
Using benchmarks is a good way to compare how well your individual investments and whole portfolio are doing relative to the standard you should be achieving.
The standard you should be achieving is typically broad-based market returns including the returns our CPF Special Account (SA) delivers (4.0%), the Straits Times Index (STI) ETF returns (19.9% this year), Singapore Bond Fund Index (0.14% this year) or even benchmarks for individual sectors such as the SGX S-REIT 20 Index or the FTSE ST Small Cap Index.
Reasons why these benchmarks may be relevant:
- CPF SA gives you a good gauge of how much returns you could be earning virtually risk-free if you just topped-up your or your loved ones’ CPF SA account.
- The STI ETF, which is made up of the top 30 stocks listed in Singapore, gives you a good idea of what the market returns for your investment should be. You can compare the returns of your blue-chip investments compared to this benchmark.
- The Singapore Bond Fund is made up of a basket of AAA-rated bonds primarily issued by Singapore government and quasi-Singapore government entities. You can compare the returns your bonds investment delivered compared to this benchmark.
- The SGX S-REIT 20 Index tracks the returns of the top 20 REITs listed in Singapore. You can compare the returns your REIT investments have delivered compared to this benchmark.
- The FTSE ST Small Cap Index tracks the returns of the biggest stocks after the FTSE ST Big and Mid Cap Index. You can more accurately compare your investments in small cap stocks to the returns this benchmark delivers.
These are the usual suspects when it comes to comparing your portfolio against benchmarks. You could also find other suitable benchmarks if you think they are more relevant.
It is also fairer to use the relevant benchmark returns to compare to your investment. If you’ve earned a return of 1% on your Singapore government bond, you may think this this is very poor compared to your investment in the STI ETF. However, if you compare it to right benchmark, the Singapore Bond Fund Index, you would realise that you’re actually beating the market and it made a good investment.
What Else You Should Be Thinking Of
You should also take into consideration all the costs and fees that go into your investments. They may seem like insignificant amounts but may snowball to eat a sizeable chunk of your portfolio returns in the long run.
Circling back to the point on portfolio returns, your portfolio should comprise investments that are diversified and from different asset classes. This will ensure that you take a minimum amount of risk, especially if you are not as in-tuned to the market as many other investors.
You should also note that receiving a higher return usually means you’re taking a higher amount of risk. There’s no free lunch in the world, and if you’re always trying to maximise your returns, you may be caught in a bad investment at some point.
Having An End Goal In Mind
You should also have goals in mind for your investment. You need to know if you’re investing money for your retirement or if you’re investing money that you’ll be requiring for your wedding in two to three years.
The way you go about these investments will be really different. If you’re investing for the long term, you can afford to ride out some of the volatility in the market. If you’re investing money you need to use in the next few years, you may want to park it in safer investments that are less volatile, but also tend to offer lower returns.
Bonds and Fixed Income