Are Your Investments REALLY Doing Well? Here’s How to Find Out.
“Better than having my money sit in the bank!”
I often hear this quote from those who get low returns on their investments.
Let's dissect this: Is beating the bank a valid marker of a good investment?
Some investments carry more risk than others. For example, government bonds have safer, more reliable cash flows compared to stocks. Government bonds are perceived to be risk-free, while stocks can crash.
If a government bond makes 3% per year, will you be alright investing in a stock that only gives 3% as well? Of course not. You'd rather invest in the bond. Why take on additional risk for the same result?
When investing in riskier assets, you must demand higher returns.
Banks are not a good benchmark for stocks and businesses. Because these investments carry more risk, we need to demand higher returns from them.
What’s my investing benchmark?
Most asset classes can be measured using their “index”.
An index is a bundle of specific investments that represents the asset class as a whole.
For example: the Philippine Stock Exchange Index (PSEi) is a bundle of 30 companies that represent the Philippine stock market as a whole. It includes names like Ayala, SM, and Jollibee.
When people say “The Philippine stock market is at 7000 today!”, what they really mean is that the PSEi was measured to be at 7000 points.
You can look up indexes for almost anything: Bonds, land, stocks of specific industries, etc.
You should measure your results against the index of the asset class you’re invested in.
Why? Because the index represents average results for your asset class. It accounts for the unique characteristics and risks of your specific investment.
If you’re invested in Philippine stocks, don’t compare your results to your bank account, bonds, or even American stock market indexes. Compare it to the PSEi. Make it apples to apples.
Are you beating the index?
80% of professional fund managers don't beat the index [1].
Beating the index is hard. If you find yourself losing to the index, you have two options:
A.) Study and build your investing knowledge until you’re capable of beating the index (subscribing to our newsletter will help!)
B.) Use index funds to copy the index
Aim higher!
Whichever path you choose, I hope this article has helped you more accurately measure your investments. With the low interest we get off bank accounts, we need to hold ourselves to a higher standard to maximize our investment income.