You don’t always have to beat the index
Question: Now that I am in the stock market, how do I know if I am earning enough? What measures do I use?—Participant at EnRich CD-RW personal finance training
Answer: I am currently in the market for a new notebook PC (or at least that is what I am trying to convince myself of). It’s bad enough that there are many CPUs to choose from, but some PCs are also already loaded with different versions of the latest operating system. Plus, the new-generation notebook PCs are ultra-light while others are in the form of tablets with clip on or magnetic keyboard. There are notebook PCs with touchscreen capability and digital pens. Wow!
It’s a good thing there are still sales people who are not after a quick sale. When I came across this particular salesman in one of my window-shopping episodes, I asked him what type of computer would be good for writing documents, crunching numbers on spreadsheets and expressing my ideas through presentation slides with embedded videos. I also mentioned that I needed one that has at least four to five hours of battery life.
The kind salesman said that given my needs, I could do with just dual core processors. And for extra battery life, he recommended an “ultrabook” or a tablet PC with clip-on keyboard. He made sense.
A notebook PC that came with the fastest processor, optical drive, touchscreen capability, long battery life, a terabyte of hard disk space and all the ports costs P60,000. The computers he was recommending would only cost about P35,000. Depending on the screen size, I could even get a branded one for P28,000.
But what does the process of buying a notebook PC have to do with trying to beat the Philippine composite index or PSEi? Your investment goals, as tempered by your risk preference, will determine what you need to earn, not a moving target like the return of the PSEi.
Firstly, nobody is brilliant in a bull market as you should be making money when almost everything is going up in value. But you don’t have to earn as much as the PSEi does if that is not what you need. Remember, it is difficult to outperform a broad market index in a bull run. Comparing your portfolio performance to that of the PSEi in this kind of a market can be downright frustrating for the novice and even average investor.
Now imagine a bear market where everything is falling. The PSEi, being a broad market indicator, technically has a portfolio that will always be invested in stocks. If you actively manage your portfolio, you would probably get out of stocks totally or at least minimize your exposure as soon as a bear market trend is confirmed. It would therefore be quite easy to outperform the PSEi. But mind you, we are talking about relative performance. So, even if you outperformed the PSEi going down, it could very well be that your return would still be negative, albeit smaller.
This is why the best benchmark for your investment performance would still be the resulting return targets borne out of your investment goals and risk preference.
Let’s say you needed to earn 15 percent per year and you actually hit this target. You should not regret your actions even if the stock market made 20 percent per year. While generating a higher return would have shortened your investing period to reach your goals, you would have also done that by taking inordinate risks on your money.
On the flip side of things, you should not console yourself with a negative return smaller than that of the PSEi’s. While losses are sometimes unavoidable, you should incur them as infrequently as possible. Remember, it is bad enough that you fell short of your target. What more if the return was negative?
There is a need to do comprehensive financial planning either by yourself or through the help of experts before you invest to ensure that you perform as close to your target as possible. If you choose to do it yourself, try the many personal finance calculators already available on the web or freely distributed. You may also try Ya!man, the country’s first personal finance mobile app that is also free from www.personalfinance.ph.
Personal finance experts abound, either as part of financial product providers or as independent financial planners. If you want to get a hold of financial planners, you may visit http://rfp.ph/find_rfp or get in touch with financial planners from mutual funds, unit investment trust funds or variable unit-linked providers. Tell them that you want a needs-based approach to financial planning.
If you want to learn more about investing, visit www.personalfinance.ph. There are many more free resources there that you can tap. You may also want to attend EnRich on May 18, our public training on personal finance.
You don’t always have to beat the index; just aim for your own benchmark returns, especially if these are lower than the PSEi’s average performance. You will end up enjoying life and investing better.
(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, investment adviser and author. Questions may be sent by SMS to 09175050709 or e-mailed to firstname.lastname@example.org. To learn more about the RFP program, attend a free orientation on April 11, 7 p.m. at the PSE Center. E-mail at email@example.com to register.)