For your investment returns report card

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An illustration of spending coins with a man calculating his expenses in background. PHOTO | SHUTTERSTOCK

Here’s one key practice that separates individual investors from the professionals: the latter get report cards. This is to say if you consider yourself serious about your investing decisions, you must evaluate your actual returns immediately and compare your performance on appropriate benchmarks.

Some key questions to ask: Are the past five-year annual portfolio returns still ahead of the benchmark Index returns? Are they getting superior (or averaging downwards) returns? How does the actual asset allocation compare to your benchmark asset allocation? Are you on track to reaching your financial goals? Are you minimising risks?

Here are a few tips to answer some of these questions.

For the annual return, start with your balance on December 31, 2022. Add to that any money you deposited during the year and subtract anything you withdrew. (This won't work if you have been putting in regular amounts all year long or if you made a large deposit at the end of the year.

In those cases, try to guesstimate a time-weighted average amount that you put in for the year -- if you deposited Sh1,000 every month, for example, add Sh6,000 to your starting figure instead of Sh12,000).

Then subtract your new starting total from the amount in your account on December 31, 2023. Divide that remainder by the starting number and the resulting number is your annual return for the year.

On making the right comparisons, don't benchmark to any other index; compare it to an investment mix that is like your investment mix (stocks, bonds, cash, real estate, etc).

An appropriate benchmark will help set realistic return expectations and instil investment discipline when making portfolio changes.

Without one, there is a danger of measuring your personal performance against arbitrary or incomparable reference points—say, a single index such as the NSE 20 Share Index or your neighbour’s portfolio.

Moreover, benchmarking appropriately provides a good basis for diversification because you can easily see how your portfolio differs from the market. If what you own is heavily skewed to a handful of individual companies—compared to a benchmark index such as NASI—you may be subject to potential concentration risks. Without a benchmark, you might not even be aware of it. You can also choose to adjust your allocations deliberately, using your benchmark as a basis for overweights or underweights.

Lastly, take appropriate action. If you like the "grades'' you see, don't fix what's not broken. But if you think you got a bad report card, make some adjustments for 2024.

Decide whether your sub-par performance is your own fault: Did you try to time the market? Did you fall for a hot tip? Were you expecting too much - Having reasonable return expectations may help you keep a long-term view? Also consider the possibility that your disappointing grades are the result of someone else's failings: If you've got mutual funds that are not meeting their objectives or charging too much in management fees, you can look for cheaper and better alternatives.

Mwanyasi is the Managing Director at Canaan Capital

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Note: The results are not exact but very close to the actual.