The sign % is a very powerful tool. It represents many things such as how a certain amount is divided, how a certain business and investment performs, how satisfactory a people is in doing his job, and many more uses. To sum it all up, it is a measure of effectiveness and efficiency and from this sign %, we based the majority of our decisions, mostly our investing decisions.
We invest our money because we wanted to have something from it, a return, and most of the time, returns are measure by percentage. There are investments that offer fixed and variable return, most often than not, the former is the defensive investment and the latter is the growth investment and we choose defensive or growth based on our investment goal. Of course, when choosing growth investments, most of us wanted a higher return while minimizing risks so that we can achieve our long term goal within the time frame that we want. So we look for a growth investment product that has a history of high returns because like what I already said, the percentage tells the product, as well as the company managing it, its effectiveness and efficiency.
The big but is how did the company arrive at that percentage and how’d it fair according to what it supposed to do? What do I mean by that?
For example you meet a financial planner or advisor that present a certain mutual fund performance and tell you that this product’s average annual return is 20% annually. The 5 year return of this product is the following: Year 1 – 8%; Year 2- 12%; Year 3- 25%; Year 4- 30% and Year 5- 25%. He gets that percentage by simply using simple average on its 5 year annual return which many think as right but the truth is not. If you invest P1,000 in this product and it grows by 20% annually like what the financial planner shows then you money at the end of year 5 should have been P2,488.32 (Investment Value x 1 + Rate of Return which is 20% annually) but instead your money at the end of year 5 is P2,457 (Investment Value x 1 + Rate of Return which is 8%, 12%, 25%, 30% and 25% annually) because the percentage have its own time value. You might think that the difference is not material but something like this is material. When it comes to investment, every small difference in the percentage has its long term impact in the value of your fund.
One more thing is when a mutual fund has a certain feature like it supposed to imitate the performance of the Philippine Stock Exchange Index (PSEi). Some financial planner or advisor will tell you that this investment product performs great because it constantly generates double digit annual return the last three years, for example, 12%, 15% and 20% respectively. Looking at the percentage alone makes it a great investment but if the PSEi for example during these years have an annual return of 15%, 25% and 33% respectively then it only tells that that investment product as well as the company that manage it is not effective and efficient.
The last thing is many financial planners and financial advisers show their clients only the good percentages which is in my opinion is not reasonable enough because that kind of presentation doesn’t show their clients the whole picture. An investment product should be presented that shows its last 10 year historical performance and while it is true that it can have an annualized average return (the return that is computed using not just simple average) of 12% annually, client still have the right to know about the bad year/s the investment has because most probably than not, in a 10 year performance, there is/are bad year/s. Every money managers even the most intelligent ones like Peter Lynch, Ken Fisher and others always has/have bad year/s so a client should always ask his financial planner or advisers to show the bad year/s of investment.
Percentage is an attracting tool for investment products that’s why everybody should know how to look at it. Because what the number shows doesn’t tell it all and often times, what beyond the percentages, are the most important details.
Jobel F. De Rosas is an optimistic and enthusiastic young professional who have a great passion for Finance and Capital Market. He is a CPA who strongly advocates Financial Literacy. He believes that Financial Literacy is one of the major gaps that separate Philippines from developed countries. Visit his Website or follow him at Facebook and Guaranteed Millionaire Page. You can also email him at carranzo18@gmail.com
ROI is a measure of investment profitability, not a measure of investment size. While compound interest and dividend reinvestment can increase the size of the investment (thus potentially yielding a higher dollar return to the investor), Return on Investment is a percentage return based on capital invested.