Wednesday, 17 January 2018

What Type of Returns You Want in Shares Investing

The aim of investing in shares market is to earn money.

Lest we end up over-simplifying the investing process, this seemingly straightforward response can actually be broken down further, to better guide your investment strategies, approach, and perhaps type of shares suitable for your investment goal.

There are 3 types/levels of returns we should aim for in this investing journey. Do spend some time to think about what we hope to get out of investing, and be clear about which objectives we are after.

To beat inflation
Someone with conservative risk appetite could be contented with low but stable returns that just beat inflation. Returns we are looking at around 3%-4%, just a tad higher than inflation, such that the purchasing power of our capital is not eroded, and preserved as time passes.

This is the most basic form of returns we can aim for - moderate but stable. One need not take on excessive risks. He could invest in bonds, bond funds, simple ETF, and large stable blue chip stocks to get the 3 or 4%.

People in this category would be happy to buy and hold onto their shares if the portfolio shows steady rise over years. These established companies, usually operating in a stable saturated industry, may also pay fairly good dividends, accompanied with  gradual share price increase

Investors in this category may also hold substantial amount of bonds, to reduce volatility in portfolio, and provide coupon cash flow.

Such an earnings model is conservative, and could be suitable to investors near the end of their working life more concerned about capital preservation.

To generate living expenses/pocket money
One could also aim to generate earnings in the market, as pocket money or to cover living expenses. Fundamental factors such as strong balance sheet or earnings growth are ignored, in favour of shares momentum - whether share price can move and earn them a few pips here and there.

There are usually strict trading rules to abide by, such as entry price, stop loss price, profit target, maximum position sizing. For example, someone with a $300k portfolio seeking to generate $2.5k per month, may limit each trade to $30k (10% of portfolio), with a 2% profit target, and 1% loss threshold.

Assume his trade calls usually hit 1 out of 3, he would need 12 trades per month to reap a $2.5k earnings (2% profit of $30k is $600; to get $2.5k, need about 4 trades; with a hit rate of 33%, he needs 12 trades).

To generate living expenses in shares market is definitely not easy and not a game for common folks. The trading rules take years to refine according to one's experience, temperament and risk appetite.

If one does this well, he is a successful trader, with strong mental discipline to follow rules, and stable temperament to remain composed during losses.

If one sucks at this, he is just a speculator. He mixes emotions with trading plan, often veering away from established rules. Delighted by small wins, but have no courage to cut loss, he does not track his returns. Perhaps thrills and emotional roller coaster is what he seeks here, instead of real profit.  

To build immense wealth
One can also aim to grow his assets into immense wealth via shares investing. This is achieved through proper homework, identifying companies with good prospect, solid fundamentals, and buying them at cheap valuation. Essentially,  buy good, buy cheap and hold.

But the drawback here is investors need to dedicate substantial efforts to learn the art of investing. Analysing financial statements, read widely to spot industry trends, hone good business acumen to pick out companies with good prospect are all part of the deal.

There are other pitfalls too. Learning about numbers and analysis financial statements are hard knowledge. Like science, one gets better at it with practice. The tricky part is investor's psychology and biases that lead to wealth-destruction behaviour eg. lacking patience to stay through the course, not having discipline to cut loss to prevent snowballing.

This method takes time, typically a few years. But I think this is the most certain route of all. And it is even more powerful if one is able to boost the investments via regular savings from salary.

My chosen path since day 1 has always been the last approach - build immense wealth. Along the way, I slowly carved out a section of my portfolio for trading, to maintain keen sense of market direction and sometimes to satisfy itchy fingers.

Have you thought about what type of returns you aim for in shares investing? Which of these 3 would it be?


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  2. Thank you for sharing such valuable and helpful information, tips and knowledge. This gives me more insights on this. I would love to see more updates from you.

    Shares to Buy


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