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1 Important Question You Must Ask Before Investing

Alright! You have found a company to invest in and you are excited. You have done your research and are quite confident you will profit from investing in this company. But before you click that “buy” button, there’s one really important question you need to ask: Can it beat Singapore’s market barometer, the Straits Times Index (SGX:^STI)?

I’ve discussed about the pros and cons of using an active or a passive strategy when investing. One of the main reasons for investors to actively seek out individual shares to invest in is the hope that their actions will earn a better return as compared to investing passively in index trackers like the SPDR STI ETF (SGX: ES3) and the NIKKO AM Singapore STI ETF (SGX: G3B). Both trackers are exchange-traded funds which aim to mimic the STI.

Therefore, before you invest in a company, it would make sense to consider the possibilities of your investment outperforming the STI’s trackers. According to the SPDR STI ETF’s website, the fund has achieved an annualised return of 8.39% over the past 10 years ended 30 September 2014

This 8.39% figure gives us a target to aim for. Let’s say you were planning to invest in Singapore’s largest telecommunications outfit, Singapore Telecommunication Limited (SGX: Z74). If you are only expecting to profit from its dividend, (the company’s dividend yield stands at 4.4% currently) and do not see the company growing its business significantly in the next decade (by extension, SingTel’s share price and dividends would likely remain stagnant over the long-term if its business does not grow), is it really worth our time and effort to monitor the company? Would it not be less risky and more effective if we invest into a passive index fund which can give us exposure to more companies and a higher chance of growth?

Foolish Summary

Having a benchmark such as the STI gives us an alternative to compare against each time we come across a company we might want to invest in. Thus, the question to ask before an investment is made shouldn’t be “can I make a profit from this investment?” Instead, the question should be “can this investment potentially beat the STI in the long run?”

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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 contributor Stanley Lim doesn’t own shares in any companies mentioned.