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Do you benchmark your portfolio?


The above article appeared in Saturday's papers. For DIY investors like me, there is always a "competitiveness" to see if you are performing better than the indices or the professional fund managers. Otherwise, you might as well hand over your money to them or invest in ETF.

According to the returns presented in the picture above, the professional fund managers and the STI ETF managers seemed to be doing a pretty good job where they generated a return of at least 11% last year. 

Benchmark my portfolio?

Since my SRS portfolio is primarily invested in locally listed stocks, the STI ETF and unit trust focused on the Singapore market are probably the correct benchmarks if I want to use them. 

I haven't benchmarked the returns on my SRS portfolio but if I do, the returns is probably lower than the ~11% recorded by the fund managers last year. My SRS portfolio has seriously under performed last year...sob sob... :(

Do you benchmark your portfolio?

Do you benchmark your portfolio? If you do, what is the rationale for doing this? Is it for information only or does it determine how you allocate your investment capital?

What is the inherent problem with using a benchmark?

The inherent issue with benchmarking my portfolio is that I am not vested all the time. I hold cash as part of my plan to deploy them during a crisis and I do "time" the market in some sense and it is causing a huge "drag" on the performance since cash is only yielding 0.5% per annum.

Similarly, holding cash is not an option for the fund managers.  They are paid to be "invested" all the time and holding cash in excess of redemption needs will invite questions from investors that they are paid to do "nothing". 

I once spoke to a professional fund manager with a reputable asset management firm. He said this to me "you must decide for yourself when you want to exit the unit trust because we have to be invested all the time. We can't sell and hold cash even if we believe the market is toppish and over-valued, otherwise we risk underpeforming against the benchmark.

Lesson: while investing in ETF and Unit Trust enhances the diversification effect and helps you solve the "stock picking" problem, you must be aware they will be more suitable for investors who want to stay invested at all times or investors who don't time the market and use dollar cost averaging as a strategy. (Pls note that I am not saying this is a bad strategy. It really depends on your time horizon and investing temperament). 

I seriously need to buck up and start investing...

I am not sure if you already know the blog - Lady you can be free. It is always inspirational to see a true investor, who against all odds, build up a millionaire portfolio over time and she is definitely enjoying her fruits of investment now. I would aspire to be like her. The reason why i say she is inspiring is because, she has done it and is not a 'slave' to the market. She lets time and compounding play to her advantage but of course, saving up for that initial capital is key.... 

Traders are always in and out of positions and spending time looking for the next trading idea while here we have someone who couldn't care less if the market moves up or down today or tomorrow. She can go travel in peace and then check her portfolio at the end of the month. 

I guess as i grow older, this is the lifestyle which i would want to pursue. Travel the world, sip a glass of wine, enjoy the sunset and let the portfolio takes care of your daily needs. This will be the picture which i am painting for the next 10 years.

My ten year plan

I want to retire by March 2025. By which time, i should have build up a portfolio worth more than $1m generating at least $50,000 in dividend each year.

I record my thoughts and plan down so that i can strive towards that and I want the make investing a part of my habit and hopefully, i can do it and inspire someone else to do it too

Will you walk this journey with me? 

Maybe we can encourage and motivate each other along the way! ^_^  Happy investing.

5 comments:

  1. A few I would like to point out.

    1. People think only of benchmarking vested capital instead of their entire portfolio (including cash) why? Can they benchmark their entire portfolio when they are using stock picking?

    2. The fund manager pointed out to exit. Does he mean that there is only 2 options:his fund or cash? Is that true?

    3. As much as lady portfolio is, is it only an initial investment amount? If so, how much is it and how much cagr is needed? If not, how much is she adding each year? And over which period in history in particular and what environment? Is the amount she adds each year significant? How does she reach that? Which cashflow generating vehicle is the one really worth investing time and effort in? If you can do it?

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  2. Hi SMK,

    My replies as follows:

    1. I included my cash position when I made the comment that I underperformed for SRS portfolio. You are right that a lot of people just benchmark the "invested" portion. Benchmark can only be used if someone stay vested all the time.

    2. A unit trust manager can't hold too much cash although they can "switch" counters. In other words, they need to be "90%" invested all the time or risk under performing against the benchmark which is 100% vested at all times.

    3. I am not privy to how much the lady earns or how much capital she injected over the 7 years. That would be better addressed by her. My speculative guess is she probably has a high income and she invested around $600k to achieve $1m with the $400k coming from dividends and unrealized capital gains. I think everyone can learn something. Some times we just lack the discipline and initiative to keep on investing. But her portfolio is skewed towards Starhub and Apple. Probably aomethjng we can learn as well. Haha. To be focused...

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  3. 1. If you included emergency cash and transactional cash and similar, I suggest you dont beat yourself up over it. For this stage of your life, those would have a higher percentage than later in life.

    2. I am not referring to reallocation to a singular fund. Ie. I am suggesting any individual not look at any particular market in combination with cash equivalents

    3. No further comments.

    happy lunar new year!

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  4. Nice article. I think a lot of people dream of the $1million finish line but once you're there would it be enough...?

    Cash is part of your portfolio, and if you are making a conscious decision to be in it to reduce risk I agree you need to include it in your overall performance.

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    Replies
    1. I guess money is never enough :) we all need to learn to live below our means.

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