The Motley Fool

Can Bob Improve Your Returns?

The Motley FoolI suspect most of us know someone who is a bit like Bob.

Bob, you see, would turn up for work every day and he would whip out his lunchbox at break-time and sit down with his friends. Together they would all eat lunch.

But every day, Bob would, without fail, open the lid of his lunchbox and let out a deep sigh. The expression on his face said it all. He would, with a heavy heart, moan to his friends about how uninteresting the content of his lunchbox was.

I make my own sandwiches

Then one day, one of Bob’s colleagues asked him why he didn’t ask his wife to make him something different for lunch. He looked quizzically at his friend and said: “What do you mean? My wife doesn’t make my sandwiches, I do.

I wonder how many of us are a bit like Bob when it comes to managing our investments. We moan about the unappetising returns we are earning and yet, we rarely do anything about it. Instead, we just carry on salting away money in our savings accounts that pay us next to nothing in interest.

In our hearts we know that over time the buying power of our savings will be eroded by inflation. But we merely tut and complain rather than take steps to put our money to better use.

Some of us may even entrust our investments to professional money managers. That is definitely a step in the right direction. At least the professionals should give us some exposure to inflation-beating assets such as shares.

But here’s the rub: most professional money managers don’t really look after our investments that well.

Professionals aren’t that good

It is reckoned that eight out of ten fund managers can’t even beat the market. The reason is simple. It’s because they charge us too much to manage our money. Consequently, many investors are disappointed by the returns they get, even though they are supposed to be investing in shares.

They often blame the market for the poor performance. But really they should look more closely at the fees they are paying. The charges are eating into the returns that they should be earning.

But just like Bob and the unappetising contents of his lunchbox they complain. However, they won’t do anything about it.

Here at The Motley Fool we have long advocated the importance of buying shares ourselves for the long term. What’s more, it is not even that difficult.

Beating the market

Let me give you a few examples.

Over the last ten years, Jardine Strategic Holdings (SGX: J37) has delivered a return of 1,353% for its shareholders. Put another way, if you had invested $1,000 in the company in 2003, your investment, which includes reinvested dividends, would be worth $14,510 today.

Other companies that have done well over the past decade include casino and resort operator Genting Singapore (SGX: G13), Singapore Exchange (SGX: S68) and shipbuilder Sembcorp Marine (SGX: S51). They have all delivered annual total returns in the mid to high twenties. Meanwhile, the Straits Time Index (SGX: ^STI) has returned around 10%.

Whilst the benchmark index has done well, some shares have done much better. That is because the Singapore benchmark comprises 30 separate companies. So the returns you get will be a blend of the returns from all those different shares.

In the main, it is generally accepted that diversification is a good thing. However, it can also be easy to fall into the trap of over diversifying.

The Buffett way to improve your returns

Warren Buffer once said that over-diversification can lower returns significantly.

He even quipped that he could improve everyone’s financial welfare by giving them a ticket with only 20 slots in it – so that they only had twenty punches. Those punches represent all the investments they are allowed to make in a lifetime.

Once you have punched through the card then you are not permitted to make any more investments.

Under those rules, he reckons that we would think more carefully about what we invest in. What’s more, we would only load up on what we really had thought very carefully about.

So every time you look at your investments, try to remember the story about Bob. Then ask yourself if you are content with eating the same old sandwiches every day or do you deserve something better. I think you do.

This article first appeared in Take Stock – Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.