Navexa Blog

The truth about portfolio performance and investment returns is a lot more complex than most people realise. Here’s three tips on better understanding how your money is performing in the market over time.

When someone asks you how your investment portfolio is performing, what do you say?

‘Not bad’? ‘Could be better’? ‘Stock X has been on a tear lately’?

If you use a financial advisor to manage your investments, do you simply glance at the ‘annual return’ figure and say that’s how your portfolio has performed?

What about income from dividend payments?

Or taxes?

What about time?

Are you happy to look at the short term and cherry pick assets that have performed well?

In this post, we’re going to explore the common problems people have in understanding and expressing their portfolio performance.

Specifically, we’re revealing three mistakes you should avoid when you’re analysing your portfolio and determining its performance.

These mistakes relate to our understanding and perspective on time, our tendency to ignore the impact of dividend income and reinvesting, and the dangers of ignoring the impact fees and taxation has on your overall portfolio performance.

Here at Navexa, we believe intelligent investing hinges on carefully analysing data to get a clear view of your portfolio’s big picture.

Mistake I: Not Annualizing
Your Investment Returns

Say you buy a stock at $5.00 and you sell it for $10.00.

Boom, that’s a 100% gain!

Awesome, you doubled your money.

Good for you. But, what’s missing from the above account of your epic gain?

Time.

Consider this; Two investors buy a stock each. The stock price of both increases by 100%.

Say it took one of them 12 months, and the other three years.

Is it the same result?

On paper, yes. Their capital doubled.

But there’s little doubt you’d rather do it in one year than three.

When you ‘annualize’ your investment returns, you factor time into your calculations.

There are various methods of doing this, but the basic idea is that you divide your capital gain by the time it took you to realize it.

So, 100% in a year is an annualized 100% gain — it took one year to realize.

But 100% over three years is a 33.3% gain, because it took three years to realize.

Annualizing your portfolio performance gives you a more balanced and realistic understanding of your returns over time.

Time, after all, is a finite resource for every investor. So it pays to factor it in!

Mistake II: Treating
Dividend Income Separately

If you own a stock that pays a dividend, you’re collecting income simply for holding the company’s shares.

Investments that pay an income are central to compounding capital and building wealth over the long term.

However, there’s sometimes a tendency for investors to think of their stock’s capital gains as one thing and their income as another.

In some ways, they are separate.

But in terms of calculating the true performance of a holding or portfolio, it’s vital to factor in dividend income.

For instance…

Say Stock A goes up 100% in price over three years (a 33.3% annualized return), and Stock B goes up 110%.

If you fail to account for dividends, you’d think Stock B would be the winning investment.

But if Stock A paid you a 8% quarterly dividend over those three years, and B only a 3% dividend…

Then you’ll find that despite returning a lower capital gain, Stock A delivered the better return on account of the superior dividend income.

This applies even more so when you’re reinvesting your dividends into new shares in a holding.

It’s vital to treat investment income as a factor in calculating you’re overall true portfolio performance.

Mistake III: Disregarding
Broker Fees and CGT Events In
Your Portfolio Performance

Every time you buy or sell an investment, you’ll pay a fee for the transaction to your broker.

Say you pay $10 per trade.

One hundred trades will cost you $1,000 — regardless of whether the investments themselves make any return.

You broker fees should factor into your portfolio performance calculation.

It’s money you’ve spent in the investment process. Money you ideally want to (more than) make back in capital gains and dividends.

The other thing to note about trading fees is obviously that the more you trade, the more capital you’ll burn in the process.

The same goes for CGT — capital gains tax — events.

In Australia, every time you sell a holding you trigger a CGT event.

For argument’s sake, let’s return to the example from earlier.

Say you make a 100% capital gain on a stock over three years.

And say that stock made you another 50% in dividends over those three years.

That’s an annualized gain of 50% (150% total divided by three).

If it was a $10,000 investment to begin with, on paper you’d have $25,000 in capital.

Now let’s deduct the broker fees for buying and selling: $24,980 left.

Now, let’s deduct a notional capital gains tax of 25% on the gain itself ($14,980).

The tax would be $3,745, leaving a gain of $11,235 and total capital after exiting the position of $21,235.

So when all is accounted for — annualization, broker fees and taxation — you’re investment, while you might have liked the sound of 150%, has returned you a 37.45% annualized return of $3,745 over three years.

How Navexa Gives You a Clearer Picture of Portfolio Performance

The Navexa portfolio tracker platform is designed to help you quickly and easily see your portfolio’s true performance.

That means, your annualized return taking into account dividend income, broker fees and taxation.

Cherry picking results to brag about — like the 150% above, for instance — might seem like a good idea.

But the reality of investing is that you must be blunt with yourself about the costs of making money in the markets.

That means not ignoring the key factors we all have to work with when we buy and sell stocks: Capital gains, dividend income, trading fees, tax obligations and, above all, time.

Financial independence or ‘freedom’ is the ultimate goal for many. But what is it, exactly? We take a look at the role of passive income and intelligent financial management in building financial freedom.

Building a passive income is something many people dream of, but few achieve.

For those who do manage to build a passive income, enjoying true financial freedom becomes more realistic.

It’s easier than you think to build a passive income stream.

Before we get into that though…

What is Financial Freedom, Exactly?

The truth is that financial freedom means different things to different people.

One person might say they only need a million dollars to feel financially free.

Another might say a billion.

Generally speaking, though, financial freedom means collecting a comfortable income from your money, instead of having to trade your time for money.

If you have enough savings, investments and liquid funds available to live the lifestyle that you and your family want, then you have financial freedom.

In other words, you might say it’s having the ability to choose how you spend your time, rather than having to devote your time to making money.

Few people achieve that goal.  

A survey by GoBankingRates found that 69% of Americans have less than $1,000 in their savings accounts.

In Australia, savings.com.au reports that about half the population has less than $10,000 in savings.

Saving for a rainy day is the first and most important step to financial freedom.

Think of it as the foundation for financial freedom.

Once you’ve created a firm foundation, you can start to look at building up passive income.

What Are The Best Ways
To Earn Passive Income?

The idea of having a passive income is often dismissed as a ‘get rich quick’ scheme.

Perhaps that’s because many people don’t like the idea of parking a substantial amount of money in an investment for a long period of time.

The truth is that passive income is the opposite of ‘get rich quick’.

It’s more like ‘get financially free slow and steady’.

There are, however, ways to make the money you are already earning work harder for you and generate a passive income through interest or an investment portfolio.

The average annual return of the stock market over a 10 year period is 9.2%.

That’s far higher than a typical savings account.

If you follow the golden rule of personal finance and pay yourself first by saving some money — even a small amount of money — then the returns you’d see investing in the stock market over the long term could be life-changing.

Imagine you invested $70 per week, every week, for a decade.

With returns of 9.2% per year, compounded, your $33,600 deposits could earn an extra $21,726 in interest, making them worth $55,396.

That’s a pretty impressive return for a relatively modest investment.

The 20-odd grand of interest is your passive income.

If you were able to invest $10,000 a year for 20 years, for argument’s sake, you can see how you’d create a substantial passive income over time.

This long-term, passive income-focused investing can become the path to financial freedom.

How Much Money Do You
Need To Be Financially Free?

Financial independence is a very personal thing. How much money you need depends on your own lifestyle.

In general, if you want to be able to live off the interest on your savings you should aim to be drawing down no more than 4% per year.

So, you should aim to save enough to be able to do that.

If you want to withdraw $40,000 per year, you would need savings of $1 million.

If you live more modestly, you could get away with smaller savings.

Do I Have To Be Rich To
Achieve Financial Freedom?

You don’t have to be rich to start saving.

Simple things like cutting your outgoings and building a modest emergency fund can help you avoid expensive borrowing.

Once you have a safety net you can start investing while looking to increase your income.

Even if you feel like the amount you can save now wouldn’t make a difference, it’s worth making a start.

Consider the snowball cliché.

Even the greatest avalanche starts with a single flake.

And if you’re serious about investing to create passive income and financial freedom, platforms like Navexa give you the tools you need to make intelligent decisions for your portolio.

The times they are a changin’. Our need to build wealth is not — but the way we do it is. Here’s some ideas on how (and why) to begin investing now.

Maybe you’re 19 years old and have yet to pop your investing cherry.

Maybe you’re 29 years old and the penny has finally dropped that grinding out a 9-5 job for the next 30 years will bring you more misery than financial security.

Maybe you’re 39 years old and you need to recover having just lost a substantial chunk of capital in the markets.

Whatever the scenario, we’re going to take a look at the investing and personal finance landscape as it stands in mid 2020 and explore a couple of approaches for building wealth from at, or near, zero.

There are some aspects to investing that haven’t changed in hundreds of years.

But there are other parts of the wealth building process that are changing faster than ever before.

If you’re starting out building wealth in the financial markets today, you face a significantly different set of challenges and opportunities than you would have 50, 20 or even just five years ago.

In 2010 index funds were all the rage.

Today, just 10 years on, cryptocurrencies, private equity, micro investing and fintech are driving innovation and disruption to the point where, to many, index funds seem boring.

Starting from scratch today is a different beast on that basis alone — leaving the major economic fallout from COVID-19 aside.

So let’s start with the basics.

The Best Time To Begin Is Always Now

Whenever you begin investing, and at whatever age, your most powerful ally (or adversary) is time.

Anything you do in life requires time.

In investing, how you spend your time is particularly important.

You’ve probably heard the statement that time in the market is more powerful than timing the market.

This refers to the generally accepted idea that on a long enough timeline, stock prices go up.

In a two year period, the market might fall 50%.

But over a 20 year period, the market will probably rise 150% to 200%.

If you’re wondering whether to begin your investing journey now, the answer is yes based on that idea.

Check out this example from The Street to see why.

Take two 25-year olds.

The first commits to investing $5,000 a year for 11 years.

Total starting capital: $55,000.

The second waits until they are 35 to begin investing $5,000 a year and keeps doing so until age 60.

Let’s assume an annualized rate of return of 8% on their invested wealth.

The one who started at 25 invests $55,000.

The other invests $130,000.

Looking at that, you’d assume the second investor would gain the most, having invested more than double what the first did, right?

Well, check this out.

At 8% a year, the first investor has grown their portfolio to $615,000.

It’s taken 35 years to generate $560,000 in profits (forgetting brokerage fees and taxation for the purposes of this example).

The second investor, on the other hand, who started 10 years later but invested over 26 years instead of 11, has grown their portfolio to $430,000 from a total investment of $130,000.

Despite investing more money, they’ve made just $300,000 in profit — more than a quarter of a million dollars less than the one who started at age 25.

That, in a nutshell, is the supreme power of time in building wealth.

That’s why we say there’s no better time to start than now (providing your personal financial situation allows it, of course — this is not personalized financial advice!).

The way that time works for you when you start right away is that your returns compound.

If you leave your money and the returns it generates in the market, then you start making returns on top of those returns.

The more time you allow for this process — which Einstein called the eighth wonder of the world — the more you can benefit from it.

And on the topic of time…

Starting Early Allows You To Be
More Aggressive In Your Investing

If you are in your early 20s, for instance, you have about 33% more time — in theory —  before the notional retirement age of 60 to go about building wealth.

That’s 33% more time you can use to experiment, learn and refine your investing style.

It’s also extra time you can use to recover from any losses you might incur from investing in higher risk assets — like small caps, speculative tech stocks, cryptos and options.

Higher-than-average risk assets can sometimes bring higher-than-average returns.

If you get up and running early in life, you might find you can make some big returns by tolerating the higher risk.

But even if you’re only getting started in your 30s, you might want to allocate a small amount of capital to trying to win big in cryptos or options.

Generally, though, you probably won’t want to take on as much risk, as you’ll have less time — in theory — to recover from any losses your capital suffers.

Whenever you’re starting though, you should:

Cultivate Financial Literacy And Discipline

The saying ‘knowledge is power’ is a cliché. But it is so for a reason.

Because in many senses, it’s true.

In investing, it is especially true.  

In order to take $10,000, or $50,000, or $150,000 and multiply it 10 or 20 or 50 times through investing, you’re going to need to obtain and interpret a lot of knowledge.

Knowledge about the markets, the world, financial technology, business — basically everything.

Becoming financially literate will elevate your knowledge about the world and consequently your ability to navigate your wealth through the markets.

It’s a constant process. Read widely, expose yourself to different ideas about making money the constantly changing landscapes of both personal finance and the wider financial world.

Keep An Open Mind
And Let Data Guide You

Beginning your investing journey in 2020 is in some ways no different from if you were beginning in the 1980s.

But in other ways, it’s markedly different.

Today, you have access to more information than ever before.

If you have an internet connection, you have the ability to find out almost anything you like about a market, stock, anything, really.

You also have access to assets that didn’t exist even 15 years ago — cryptocurrencies — and ways of getting into the market that are only possible because of technology.

Micro investing is a prime example of that.

The apps and platforms that allow you to invest pocket change into funds and stocks take advantage of many strands of modern connectivity and financial technology to make investing more accessible and easy to understand.

You may have heard this trend called the ‘democratization of investing’.

This trend is the latest evolution in the history of wealth building.

Combined with the sheer amount of information available, the current state of the investing world means you have more power and knowledge than ever with which to begin your own wealth building journey.

The bottom line is, if you’re starting that journey in 2020, you should take advantage of the centuries of knowledge and research available to you — and the latest technology to help you implement that knowledge in your own investing.

To sum up then, if you’re just starting your wealth building journey…

Start as soon as possible and take advantage of every tool and piece of knowledge you can.

And now, a shameless plug for the platform we’ve designed to help you do just that.

This interplay between knowledge and technology is central to our portfolio tracking platform, Navexa.

We’ve built it to help you empower yourself and inform your decisions with near real-time data and analytical tools that, in decades past, would only have been available to those in the financial industry.

You can sign up free and get access to advances investing analytics and reporting tools, beautiful customisable charts and benchmarking.

Begin your Navexa trial here.

How do you work out which stocks represent sensible long-term investments? We dive into the world of valuing potential investments on the stock market.

With more than 2,200 listings on the ASX, how do you choose a single stock to invest in?

For many of us — especially those of us who hunt for value over the long term — the process begins with valuing a company whose shares trade on the stock market.

It won’t come as a surprise that there are many ways to go about valuing a company.

We all approach investing and building wealth in our own way.

Just as some investors look for high potential growth stocks that could explode hundreds of percent higher in a short time…

And others prefer to buy and hold large, relatively stable stocks for a long time…

There’s a variety of options available to you as you evaluate the value of a potential investment.

Here, we explain a few of the main ones.

First, though…

What Does It Mean To Value A
Stock — And Why Should You Do It?

When you buy shares, you own a fraction of the company whose stock you acquire.

This means that before you buy shares in it, it makes sense that you understand the business you’re buying into.

This, in turn, means you need to delve into the business’s finances.

The phrase ‘due diligence’ refers to this process.

If you don’t know what you’re buying into, then you’re not investing.

You’re gambling.

Your due diligence — the necessary research, in other words — is what differentiates a bet from an investment (which is still a risk, of course, but a calculated one).

Determining a business’s financial health allows you to understand whether or not its share price accurately reflects the company’s value.

The stock market is seldom a perfect reflection of the value of the companies trading shares on it.

After all, everyone in the market is looking for opportunities to make money by speculating on the future.

This means that a company’s shares can easily trade below or above the ‘true’ value of the business they represent.

This is where valuing a stock gets interesting.

Popular Ways Of Valuing A Stock

The simplest measure investors use when trying to get a handle on a stock’s value is the price to earnings ratio, or P/E ratio.

The P/E ratio is the current share price divided by what the company earned for every share over the past year.

Generally speaking, the higher the P/E ratio, the more overvalued you might say a company’s shares are.

A lower P/E, on the other hand, might indicate the market undervalues the shares relative to the overall health of the business.

Other common ways to approach valuation include:

Cash flow: While a stock might not be getting much love from investors and trading cheap, you might fight when you dig into their financials that the business has a strong cash flow (that they make a good return on their spending, in other words). This could be an indicator that the share price will rise higher as the market notices the business making more money in the future.

Debt ratio: Work out how much money the businesses owes to others. Low debt, generally speaking, is a positive sign that a company is healthy and its stock price may rise in the future.

Assets/liabilities: Another helpful ratio to deploy in valuation research is assets/liabilities. This is exactly what is sounds like. Divide the value of the company’s assets by the value of its liabilities. The higher the ratio, the better.

Using Navexa’s Built-In Value Calculator

There are, as they say, many ways to skin a cat.

When it comes to valuing a stock, there’s a huge array of ratios, calculations and methods available to help you get an idea of where a company’s shares are trading relative to its ‘true’ value.

It’s up to you to find the method that best fits your investing style and wealth building goals.

But to make life a little easier for our users when they are trying to value a stock, we’ve built a simple value calculator into our portfolio tracker.

Our calculator uses the discounted cash flow method.

This method determines the value of an investment based on future cash flow.

It’s based partly on hard, current numbers, and partly on predicted or forecast future numbers.

This method is similar to what Warren Buffett uses to value a stock.

If the discounted cash flow works out to be higher than the current cost of the investment, this is an indication that the price could rise in the future.

It’s not guaranteed or 100% accurate. No method that estimates future events can be.

And it is just one of the ways to go about determining value when evaluating a stock.

We recommend you try different methods until you find one that suits you best.

Try ours here!