How to determine if your investment has been a good one?
When someone ask you about your current investments, one of the first questions you are likely to be asked is about how well had you investment has been doing? There are several ways to answer this question. One obvious way and certainly the most common way (and not the common way just by chance but because it turns out to be the easiest one too) is to simply look at the past performance achieved in term of absolute returns. Let’s take a very simple example and let’s say that you bought one stock for $50 a year ago. Since then let’s further assume that you have received $5 cash dividends (at Anh Thomas Investment we love cash dividends) and the current share price of your stock is now $55 (well done you have made a profit!). So, if you sell your stock now, ignoring tax implications since we are talking about gross returns, you would have made a profit of $5 on top of which you will need to add the $5 dividends you received, so we are talking about a whole profit of $10 out of an initial investment of $50, in other words a 20% gross return. Ok, so now should you be happy with your 20% return before taxes? That is where judgement is needed. In one way, the answer is straightforward and is simply yes. Under most circumstances, you should indeed be very happy with a 20% annual return even before taxes. In these difficult days, any investment returning more than inflation is quite a good one! On thr other hand, simply being happy with a 20% return without taking the time to properly analyse this performance would be a mistake. Why? Because you always need to compare your investment performance to the relevant benchmarks. These benchmarks include inflation, general stock markets performance but also the performances of other types of investment, that is gold, real estate and others. Only then will you be able to have a clear idea of how well your investment has been doing.