How To Have Your Investments Make A Bigger Difference To Your Portfolio

In my previous article, I looked at the importance of calculating our current net worth. After taking stock of our personal balance sheet, we can better plan our investments to make sure that it will make a meaningful impact on our future wealth.

Let me use an example to illustrate what i mean. Meet Hafiz. Hafiz is a 30-year-old just starting a family. He has purchased a home and is expecting his first child soon. His house is currently valued at S$400,000,with a mortgage of S$350,000 on it. He has started investing in the stock market and currently has about S$10,000 worth of shares. Hafiz has also saved about S$100,000 cash which he and his wife keeps in their fixed deposit accounts.

This is what Hafiz’s balance sheet would look like:

So, with his balance sheet, Hafiz can make decision about his investment and how to maximize its effectiveness. Now, we can see that Hafiz is only investing 6.25% of his net worth while keeping 62.5% of his net worth in cash. That means that he is not making good use of his current net worth. With only 6.25% invested, his investment can hardly make a big impact on his wealth. Even if he makes a 50% gain in his investment, he will only add about 3% more to his overall net worth. In theory, he can afford to increase his investment to a more significant amount.

Secondly, although it is important to keep a certain amount of cash to be used as an emergency fund, having most of his wealth in cash might not be the best idea. Especially when he still has a S$350,000 mortgage in his balance sheet. So how should he look at this situation? A good way to look at it is to compare all the interest rates of all options. The interest rate for his cash in fixed deposit should be generally less than 1% while mortgage rate now is about 2%. That means, his cash is only earning about 1% while he is paying 2% interest in his mortgage, it might make more sense if he pay down his mortgage with the cash he has. Alternatively, if he feels that he can earn more than 2% a year from his investment, he might want to invest more of his cash to offset the interests he needs to pay for his mortgage. Earning more than 2% might not be an impossible feat as the SPDR STI ETF (SGX: ES3) which tracks the performance of the Straits Times Index (SGX: ^STI) passively has been able to achieved an 8.6% annual return since its inception in 2002.

Foolish Take

By taking stock of your own net worth, you can review your balance sheet and make adjustment to your investment to make sure they are being allocated in the most effective and efficient manner.

For more (free!) investing tips and tricks and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any company mentioned.