What number matters most in investing? Your returns.
Mention robots, and we’re likely to think about a metal-clad machine in the popular likeness of anything from R2-D2 from Star Wars to the Terminator to Wall-e.
But robots are no longer the stuff of fiction. The robots of today are everywhere to the point you probably don’t even notice them – they are the vacuum cleaners in your home, the Siris on your mobile phones, and soon, the vehicles on the road, bringing small revolutions into everyday life.
It is a similar story in the world of investing. Robo-investing has grown tremendously in recent years, driven by greater adoption of technology, rising disposable income, and younger, more tech-savvy investors.
This is great news for consumers. Robo-investing allows investors – whether newbies or veterans – to take a hands-off approach to investing with more convenience and at lower fees. It redefines the user experience.
But as appealing as these features are, the danger is that they could end up occupying the spotlight and push the most important metric into the backstage: your investment returns.
To really understand how well your investment is doing, you have to keep an eye on its performance, or the returns on your investment. And the good news is that this is no rocket science – it’s about reading the report card and picking out the things to look out for.
Putting your money to work with hybrid robo-investing
But first – let’s unpack the concept of robo-investing. What is it?
Rather than human financial advisors, robo-advisors are digital tools that build and manage your investment portfolio using advanced technologies such as data analytics and Artificial Intelligence. The goal is to make investing simple and accessible.
DBS digiPortfolio is one option offering hassle-free, ready-made investment portfolios that are diversified between equity and bonds to help investors protect and grow their wealth.
Unlike many robo-advisors in the market, which run purely on algorithms and rules, DBS digiPortfolio mixes the best of human expertise and robo-technology. This is especially useful when it comes to market scenarios that are not in the rulebook, where human intervention is critical for high-level strategising.
DBS digiPortfolio is developed by a global, established bank, which also means a track record for results. This is one feature that newcomers in the market may not necessarily have.
But which one works for you? It all comes down to performance.
What to consider when evaluating investment performance?
There are three key components to consider when evaluating performance. To put it simply, let’s think about coffee. Most of us love our lattes, but many of us also can’t do without our kopi siu-dai. Both are coffees, but they don’t taste the same. They also come with very different price tags and are valued by consumers differently.
It’s the same with investments. Let’s take a look.
First, compare your investment to a point of reference that is relevant and appropriate.
If you are a kopi drinker, you would compare your favourite stall with Ya Kun and Toast Box, but not against Starbucks or Coffee Bean.
Take the digiPortfolio Asia Fast n’ Furious for example. Because it is based in Singapore dollars, and built to tilt towards equities, it may be appropriate to reference its returns against a combination of the Straits Times Index (STI) – a market capitalisation-weighted index that tracks the performance of the top 30 companies listed on the Singapore Exchange – and Singdollar bonds.
In 2020, digiPortfolio Asia Fast n’ Furious clocked a full year of 7.6%. Next to STI’s 8% decline over 2020, this was an extremely solid showing.
But it would be counterproductive to compare any Asia digiPortfolio to say, the S&P 500, a stock market index of the 500 largest companies listed in the United States, because the geographies and sector composition are completely different.
Second, risk is a big part of the equation – and you should factor this into your evaluation process.
In fact, it is almost inevitable that any massive, dazzling return would teether on a whole lot of risk. The question is whether the investor is prepared to stomach that risk, and how much of it.
Again, one way to look at it is the kind of beans your coffee is made from. Some prefer Arabica which has a smoother and sweeter taste compared to Robusta beans. And if the concentration is tuned up too much, the coffee becomes way too bitter.
Similarly, in investing, most people are okay with some level of risk for a certain level of reward. But too much risk makes the entire investment too much of a hairy affair.
For instance, technology stocks have outperformed those in many other industries this year. The shares of American electric car giant Tesla alone have skyrocketed more than 500% since January.
Against this, even digiPortfolio Asia Fast n’ Furious, which caters to investors with a higher risk profile compared to others in the digiPortfolio, pales in comparison. But does it make sense to look at digiPortfolio Asia Fast n’ Furious alongside US technology stocks?
Not really. US technology stocks come with huge volatility. As much as they can soar in good times, they’re often the first and hardest to be hit in turbulent times, because most of them tend to be valued based on how they will do in the future.
What this means for investors is that for every adrenaline rush that comes with a huge surge, you can also expect to see huge dives. It is one rollercoaster of a ride – and not for the faint-hearted. While you can gain big, you may lose big too.
That said, DBS digiPortfolios have been able to perform strongly in the past year thanks to its diversified and resilient portfolios that seek different sources of returns as well as the investment acumen of the DBS investment team, who monitor the markets and rebalance portfolios to keep them aligned with our investment views.
(Read more: Latest commentary on ETF-based digiPortfolio)
Third, know that you are investing for the long run.
It takes time for coffee beans to grow, get harvested and roasted for the perfect brew. If harvested prematurely, the coffee could taste awful (too weak, no kick).
Likewise, investments take time to grow. And it is only with hindsight that we can talk about the performance of an investment.
US stocks have dazzled investors everywhere as the ‘best-in-class’ performer in 2020, beating Asian stocks by a mile. Yet it remains to be seen whether this growth can be sustained in the long run.
While Asian stocks were not the outperformers, let’s not forget that in what has been a challenging year, Asian markets like China and India have offered investors of DBS’s digiPortfolio Asia another stream of returns. The portfolio’s diversified approach has also helped to reduce risk and volatility.
And Asian stocks are primed to do even better in the years ahead. Our latest Chief Investment Office Insights 1Q’21 report notes that an improvement in risk appetite, thanks to vaccine discoveries and new US political leadership, will benefit Asia.
As Asia continues to open up in the coming years, its rise is likely to continue. Singapore’s sovereign wealth fund GIC noted that Asia’s share of the global economy has more than doubled over the past 40 years, and its financial markets have developed significantly to command close to 40% of global market capitalisation1. These are hopeful signs for investors in this part of the world.
The takeaway is this: taking a snapshot of an investment’s performance at a fixed point shows a picture, but it does not tell the full story.
Recall the first time you took a sip of coffee. It was scalding hot, bitter, and you probably spat it out. But with time, you grew to love everything about it – the smell that hits you with a fresh brew, the warm aftertaste that follows the first sip, and the need to have another cup when you empty out your first.
Investment, too, takes time. Stick with it, and you will eventually love it too.
1 Feature Article: Asia’s Growing Importance in the Global Economy and Financial Markets. GIC. Retrieved on 7 Dec 2020 from here.
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This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.
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