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Financial Literacy

Why you should measure the performance of your investments

Investment performance is best understood after understanding what an investment is. Simply put, investment is the initial forfeiture of something of value, now, in exchange for the anticipated benefit of getting back more than what was forfeited.

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investments, how to measure the performance of your investments., Here are ways to ask family and friends to fund your business - PART 2 , An introduction to repos

There is a jingle in one of the television stations in the USA that reminds me, at the end of each month or quarter and year, to find out where my investments are. The Jingle goes like this, “It is 10 pm; do you know where your children are?” That question gets asked every night, seconds before the 10 pm local news. Even comedians, musicians and movie producers/writers have used and continue to use that question in their lines of comedy, music or movie to emphasize one need or the other.

Actually, that question became important and needful following the urban unrest and rioting in the USA in the summer of 1967. It was the then director of Air Promotions at the New York’s WNEW-TV that coined that phrase to remind parents to keep an eye on their kids by keeping them off the streets.  Since 1967, times have changed. Yet, that phrase is as important and needful in 2019 as it was in 1967.

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Measuring your investments

Indeed, nowhere is this question most important than in investment performance measurement, where investors should be asked, “It is the end of the month, (the quarter or the year), do you know where your investments are?” The phrase can be used as often as possible, as a reminder to check investment performance on a weekly, monthly, quarterly or yearly frequency.

What is investment performance?

Investment performance is best understood after understanding what an investment is. Simply put, investment is the initial forfeiture of something of value, now, in exchange for the anticipated benefit of getting back more than what was forfeited. The difference between what was forfeited or put in, and what is gotten back, (the anticipated benefit), is the return on investment.

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Performance measurement, therefore, is the technique or method by which an investor quantifies how much return he or she earned. Depending on the extent, it may also include quantification of how the return was made (attribution analysis) and what risks were taken to generate such returns.

[YOU SHOULD READ THIS: A guide to how Mutual Funds work in Nigeria]

Why Measure Investment Performance?

Investors invest with an objective and strategy. So there is need to purse and check if the objectives are being realised and also if the strategy designed for the achievement of the objectives is working. Therefore, the need for investment performance measurement arises so as to-

Monitor Progress: Investment performance measurement helps investors to monitor the process towards set investment objectives with a view to either modify the objectives or modify the strategies to get to the objectives. For example, if you are saving or investing for your retirement, investment performance measurement will help you compare your returns against the projected future asset value required for your retirement. If the rate at which you are saving and the return you are getting will not lead to the accumulation of sufficient amount at retirement, it then calls for either increasing your savings rate and/or changing your asset allocation or investment strategy.

The potential cost of having an underfunded retirement asset makes investment performance measurement even more important. It helps you answer the quest, “am I there yet”, if not, “how far away am I”, if too far from your investment destination, it helps to answer the question, “will I get there at the rate I am going”.

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[READ FURTHER: This is the best Mutual Fund in Nigeria this year so far]

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Asset Selection/Allocation: Investment, especially capital market investments, involves putting your money in different asset classes and types. Different assets have different characteristics and behave differently. Also, different assets yield different returns. Investment performance measurement, therefore, helps you to find out how much returns, different asset classes/types are making with a view to reallocating your assets or carrying out a rebalancing of your portfolio.

It is always good for investors to use the proper savings, spending, and asset allocation strategies that will provide them with the highest probability of reaching their investment goals with an acceptable level of risk. Unfortunately, market dynamics keep changing and as such, the decision on asset allocation needs to change in line with changing market conditions.

Investment performance measurement helps to find out what needs to be changed with respect to asset allocation strategies. For example, if you have a portfolio that is 80% invested in fixed income securities and 20% in equities because interest rates were over the roof, and over time, yields begin to fall while equity markets begin to pick up, you will be able to find out if the return you are making from your fixed income securities are lagging the return from equities through performance measurement, and then, you can decide to reallocate slightly away from fixed income to equities, maybe in a 50-50 or 60-40 asset allocation ratio.

Manager Selection: Due to the complexities in stock market investments and the complex nature of the instruments traded therein, most stock market investments are not on DIY (do it yourself) basis. Many investors invest through fund managers. Investors should select fund managers with a proven track record of successfully managing funds with positive returns.

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Performance measurement provides the data needed to uncover managers’ track records. It does not end there, though, because, once you have selected a manager based on the track records uncovered by investment performance measurement, among other selection criteria, the managers’ performance needs to be reviewed and measure in an ongoing basis so as to know whether to retain such a manager or to fire him, investment performance measurement acts as a tool for periodic manager assessment.

Investment performance measurement comes very handy if an investor is investing with more than one fund manager as such measurement could provide a good yardstick for comparing between or among fund managers, especially when an investor wants to allocate more funds to fund managers.

READ THIS UP: How will 2019 look for you as an investor?

Past Performance does not Guarantee Future Performance

There has always been the phrase, “past performance does not guarantee future performance”, agreed, performance measurement is backward looking but the results derived from such measurement help to inform and shape investors’ forward-looking decisions.

But is not that simple…

Investment performance measurement is not as easy as that but it is an important tool in the hands of investors. It is not easy because it requires data and analysis, which may be quite involved if you want to dig deeper and if the data are not readily available. In my next article, I will detail the “how” of investment performance measurement because this piece has dwelt only on the “why” of investment performance measurement.

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

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Billionaire Watch

Want to be like Warren Buffet, Michael Phelps? Here are their secrets

The distinctiveness among Buffet, Dangote, Ovia, Phelps, Bolt, Musk, is not what they do, but how they do it and how often they do it.

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Warren Buffett

Michael Phelps won 22 Olympic medals (18 gold), how did he do it? Well, he trained and trained and trained, then he ate and ate and ate every day. He was also blessed with natural attributes i.e., he was tall.

So, wait, if I am tall and eat, and train, I can also win 18 gold medals? No! but stay with me.

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Warren Buffet likes to invest. He reads research reports, likes numbers and is always looking a discount deal on great stocks. Ok. So, if I am good with numbers, research buy great stocks I will become as rich as Warren Buffet? Well, maybe not as rich but you will earn more from your investments. The distinctiveness among Phelps, Bolt, Buffet, Musk, Dangote, and Ovia, is not what they do, but how they do it and how often they do it.

READ ALSO: Investing in Cryptocurrencies during this economic shutdown; here’s your need to know

Let’s look at an Olympic swimmer like Michael Phelps. When Michael was eight, he wrote out his goals; he wrote, “I would like to make the Olympics,” then listed his time goals for the various races i.e. breaststroke, freestyle etc. At the age of eight, this future Olympian had visualized his goals, written them down, and put a date for accomplishing them.

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When seeking to create a financial plan, it is impossible to achieve success without visualizing out a goal on paper. Imagine creating an investment plan without any idea of a retirement date or income or rates of return. It’s impossible without a clear road map to determine how much to save and invest for five years. During his teenage years, he trained “every single day, 365 days a year, Sundays, Christmas and Thanksgiving days included… and twice on his birthdays,” says his coach, Bob Bowman.

If an investor saved N1.00 every day for 5 years at 0%, that saver would have N1,826.00 What if those savings increased to N5.00 and were invested at just 5% annually? Then the savings pot will become N10,373.04. Yes, inflation will erode the value after 5 years, but applying a 13% inflation rate, the saver still has a real saving of N5,170.14.

READ MORE: Top 10 risks Nigerian businesses will face in 2020/2021 – Report 

So, the second lesson we take from Olympic champions is to start early, save, and then invest constantly. Micheal Phelps is a swimmer, a sport for endurance and speed. What do endurance athletes like swimmers and marathon runners eat? Food rich in carbohydrates; they need the carbs to fuel the massive amount of energy they expend during their sports. Phelps, for instance, for breakfast eats as many as 12,000 calories prior to his races. His breakfast consists of “three fried-egg sandwiches, three chocolate chip pancakes, a five-egg omelette, three sugar-coated slices of French toast, and a bowl of grits.”

What does a sprinter like Bolt eat? Not calories but lean protein, eggs, meat, fish, dairy. Protein allows muscles to recover and develop after sprinting, which causes minute damages to muscle fibres that can be easily converted to energy. So, two different Olympic champions, each multiple gold medal winners, but because of their different sports, they eat very differently to achieve a different objective.

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Similarly, in investing, each investor is different, bond investors have instruments that have 30-year durations as opposed to stock traders who may be looking to buy and flip a stock in hours. What is key is to invest according to a stated objective and risk profile.

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Where the investor has a longer endurance factor to risk, meaning the investor can accommodate volatility in his earning, that investor will be comfortable investing on equities. Equities are higher-risk investments and can lose all invested capital but can also gain 100%.

However, where the investor has a lower risk endurance, then the investor will fill his plate with lean risk asset classes like sovereign bonds which offer lower volatility to stock and deliver a fixed return, but suffer if interest rates rise.

Thus, our third lesson from the Olympians, the food each investor eats, is a function of his individual sport. Where the investors have lower risk, his asset allocation diet is different. Each investor must tailor his asset allocation to his objectives and investment goals.

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Investment Tips

Proxy Voting: Making Your Voice Heard Inspite of COVID-19

Proxy voting is a process where one person chooses another to represent him or her in casting a vote on his or her behalf.

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Proxy Voting: Making Your Voice Heard Inspite of COVID 19

One of the privileges of owning shares in a company is the ability to attend the shareholders’ meetings and vote on important issues about the company. In most cases, such issues touch on dividend declaration, election and/or reelection of directors, authorization to fix independent auditors’ remunerations, and the election of members of the audit committee, among others.

It has been observed that shareholders love to attend such annual general meetings in person for the pride of place it provides, as well as the social status it bequeaths to the attendees in addition to the souvenirs they receive during such meetings.

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Unfortunately, that era of a social event involving the physical gathering of shareholders seems to be going extinct, thanks to COVID-19.  However, in spite of the devastating effects of COVID-19, and the changes it is bringing to our social life, shareholders can still make their voices heard during non-physical shareholders’ or annual general meetings. This they can do using proxy votes.

What is Proxy Voting: Proxy voting is a process where one person chooses another to represent him or her in casting a vote on his or her behalf. Proxy voting has not been more important than in the present COVID-19 times. In reaction to the pandemic, proxy voting is being used in areas outside corporate governance. For example, the US House of Representatives is pushing for proxy voting as a means of getting things done in the house. In a proposal released by the House Speaker, Nancy Pelosi, US lawmakers would be allowed to cast votes for their colleagues who are not in the Capitol in person. That underscores the advantage and the increasing importance of proxy voting.

Nigerian Companies and Proxy Votes:  Proxy voting is not new in Nigeria, especially among Nigerian companies. Whether it has been effectively used or taken advantage of is another question. However, Nigeria’s Corporate Affairs Commission (CAC) has been proactive and forthright in its quest to ensure that companies in Nigeria and Nigerian shareholders alike, take advantage of the proxy voting process in keeping with the social distancing rules put in place by various governments to curb the menacing COVID-19. The CAC has therefore asked companies to take advantage of “S.230 CAMA on the use of proxies in holding their Annual General Meetings.”

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(READ MORE: IMF, World Bank to hold virtual meetings over Coronavirus epidemic)

In line with the availability of the proxy voting process as a way to give every shareholder a voice and the encouragement and enablement from the CAC, many companies in Nigeria are complying with the advice. A visit to the website of the Nigeria Stock Exchange indicates that all the 30 companies that notified the public about their annual general meetings via the Nigeria Stock Exchange, since April 1, 2020, included notices or indications of the need for proxy votes in such notifications. Many of them even included links to live-stream the events, for those who would like to participate online.

Proxy Voting: Making Your Voice Heard Inspite of COVID 19

Brace for Change: There is no doubt that COVID-19 has changed and will continue to change the way certain things are done. From the look of things, proxy voting may become the new normal in corporate governance and conduct of shareholders Annual General Meetings.

Shareholders, big and small, should start getting used to voting by proxy, especially those who have not been doing so in the past. It is only by so doing that you will make your voice heard, in the affairs of the company in which you have worked so hard to invest in.

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Coronavirus

COVID-19 reveals that many Nigerians have no emergency savings

The playout of events following the lockdowns resulting from the ongoing COVID 19 pandemic shows that Nigerians do not have emergency savings

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Though we are still grappling with the effects  of COVID-19, it may not be too early to begin to take stock and find out what we did well during the pandemic and what we should have done better.

Almost everyone’s radar has been on the ill-preparedness or lack of appropriate response by the government, with little or no time for an inward look at ourselves.

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The type of government we have in Nigeria should not have left anyone surprised at their response to the pandemic, especially when it came to the welfare of the populace. What do you expect from a government that is dysfunctional, at best?

With such government, it is time for Nigerians to begin to watch out for themselves and prepare for the unforeseen, like the times we are in currently. The playout of events following the lockdowns caused by the ongoing COVID-19 pandemic shows that Nigerians do not have emergency savings.

According to a recent publication from one of the national dailies, “Barely one month of a lockdown of Abuja, Lagos and Ogun state, millions of Nigerians had become stricken with hunger. Many could not bear an extension of the movement restrictions.” The ensuing protests were indicative of the fact that many Nigerians were living off their daily incomes with no savings to fall back on.

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High Poverty Level

Many may have asked how they could save without having funds, to begin with. Agreed, the level of poverty is high in Nigeria; however, people should know that having savings is not a luxury, but a necessity. It does not have to be large, but putting aside something, no matter how small on a regular basis goes a long way in times of emergency.

I have seen images of Nigerians who surprised themselves and others with how much they saved over time in their piggy banks. There is no hard and fast rule of how much one should have in emergency funds, but there seems to be an agreement among financial analysts and planners that having the equivalent of 6 months’ expenses in your emergency savings account is the ideal.

The author of the book “Richest Man in Babylon” stated it clearly that if you do not save, it means that you have paid everyone else but yourself.

How to Start Saving

Pay yourself first: In line with the instructions in “The Richest Man in Babylon,” when you receive your monthly salary or collect that sales proceed from your business, “pay yourself first” by saving at least 10% of your collections or salary. For the salary earner, set up a direct deposit account where the money would be taken out of your pay directly into a bank savings account. By so doing, you are forced to save.

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(READ MORE: If you experience these signs then know your salary is not enough)

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Cultivate the savings habit: Just as spontaneous buying is a habit, form the habit of saving. Do not see saving as putting aside the remnants (if any) after all your expenses. If that is your attitude to savings, then you fall into the group that pays everyone else but themselves.

One thing is certain; as long as you have the money, there will always be something that is going to demand that money from you.

 

Remind yourself to save: If you are a salary earner who does not want to set up a direct deposit from your paycheck or you are a businessman or woman of any means, you can set up a savings reminder around the time you receive your salary or around your peak business time.

One website that can help you with this is here. With this, you can send an email to yourself to be delivered around the time you expect to receive your pay or business income, reminding yourself to save. Just like you set an alarm on your mobile phone, you can do so with a reminder to save.

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Start Small ASAP: The Bible says that if you are not faithful with small things, how can you be faithful with larger things. You do not need millions to start saving, all you need is the will, the determination, and consistency. So, start small and start now, but be consistent.

Reduce your Expenses: As already noted, one of the reasons that people do not save is because their expenses keep increasing, even when income sources are shrinking. If you find yourself in that situation (and you surely will, at one point or the other), cut down on your expenses and make them fall in line with trends in your income. Avoid spontaneous, emotional and flamboyant buying. Buy out of need, not out of want.

(READ MORE: Between saving, investing, speculating, trading & gambling)

Why It Seems Difficult to Save: To a whole lot of people, it is difficult to save because they live in the now. This is what financial psychologists call scarcity of attention. This scarcity of attention stops people from seeing what is really important and makes them see the urgent current expenses they need to cover.

5 Money Mistakes You Might be Making, COVID 19 Shows that Many Nigerians have No Emergency Savings

One reason why it is difficult to save is that while the expenses keep rising (out of increased need and inflation), sources of income keep shrinking or stagnating. The good thing however, is that we have the option to shrink our expenses in line with shrinkages in our income, but often times, we do not choose to do that. That is where the inability to save starts from.

Conclusion: If there is any lesson, we learned from the sudden outbreak of COVID-19, it is and should be that emergencies happen, and efforts should be made to cushion the financial impact of such emergencies by preparing for them in advance through emergency savings.


 

Written by  Uchenna Ndimele uchenna@mutualfundsnigeria.com

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