One of the first stocks I ever bought was a total disaster. Or so I thought.
After holding it for five years, the value had risen 0%.
I would have been better off loaning the money to a friend and asking them to pay me $1 in interest.
So I logged into my broker account to sell my shares.
Before I hit ‘sell’, I figured I’d work out how much money the shares had generated in dividend income.
To my utter amazement, the dividends had nearly paid me back my whole investment.
This changed my perception of the investment completely.
What I thought had made me nothing has, in reality, returned 100% — just not in the capital gains I was looking for.
This is the power of knowing all the factors of investment performance.
Unfortunately, most investors don’t have an easy way to calculate things such as dividend performance.
This means they end up making poor decisions based on incorrect data.
And as a data-driven investor, this pains me.
Here are the four things you absolutely must understand about any investment.
1. Capital Gains
Obvious, right?
Most investors buy into an investment, hoping that the price will go up, resulting in a capital gain.
This is one of the main metrics to track for any investment.
Like I said, obvious. But important.
2. Dividend Income
As you saw in my story about the stock I nearly (stupidly) sold, dividends can have a huge impact.
If I hadn’t calculated the investment income and factored it into my performance, I could’ve sold this holding and ended up missing out on future profits.
Not only that, dividend income — in Australia at least — carries tax implications. These are difficult to manage if you’re not property tracking your investment income.
3. Currency gain & loss
This one is crucial when investing in foreign stocks.
Currency exchange rate fluctuations can massively impact investments.
See the USD/AUD currency chart for the last 5 years.
Say you bought a $10,000 dollar investment in a US stock from Australia, in March 2020.
In December 2020, the exchange rate completely turned around in dramatic fashion.
Assuming the share price of the stock hadn’t changed at all.
You would have made a 32% loss, on the currency movement alone.
Sometimes this shift is against you and other times it can make you a lot of money.
But if you don’t measure it, you’re not going to know, either way.
4. Time
What do you mean time?
Well let me ask you, would you rather make a 100% gain in one year…
Or a 100% gain over five years?
Basically anyone I know would choose the first option. So would you, right?
Look at this scenario.
You buy ‘Stock A’ for $1 and in the first year it goes up to $2.
Happy with the 100% gain, you keep a hold of this stock for another year.
But in that year, the price stays at $2.
So now instead of a 100% return, you now have an annualized return of 50%.
You can see if this plays out across a few more years staying at $2, it quickly eats away at your performance.
Which is why it is crucial to factor in time when you analyze your investment performance . This is what we mean when we talk about ‘annualization’.
These Are The Four Pillars of Investment Performance
Capital gains. Income. Currency gains. Time.
These are what I call the four pillars of investment performance.
Any investor who’s serious about building wealth long term should, in my humble opinion, understand and track these factors.
Remember how I nearly sold a stock that had doubled my money?
These are the sorts of poor decisions investors might make if they don’t have all the information.
It’s very rare for anyone to fluke their way to success or wealth.
For most people, a plan, a strategy and a certain amount of discipline is a much better path than trying to get rich quickly with a financial fluke.
This is why I’m a data-driven investor.
Because if you can’t measure it, you can’t improve it.
The data doesn’t lie,
Navarre
The Data-Driven Investor