How to maximise investment returns

[SINGAPORE] The Straits Times Index has been on a winning streak over the past month. As at Jul 24, the benchmark blue-chip index has enjoyed a 14-day streak of unbroken increases, sending the index past its all-time high.

For those who invested early, this rally has likely translated into solid capital gains. But the extent of your profits will depend on how your investments are allocated.

If a significant portion of your portfolio is parked in stocks and other growth-oriented assets, you’re likely to have seen strong returns. On the other hand, having too much cash on the sidelines could have meant missed opportunities.

Here’s why your asset allocation matters – and how you can make the most of future rallies.

Asset allocation determines returns

Your portfolio’s returns are closely tied to how much of it is invested, versus how much you keep as cash.

Let’s break this down with a simple comparison. Imagine three investors, each starting with S$100,000.

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• Investor A invests S$90,000 into an exchange-traded fund (ETF) tracking the STI, and keeps S$10,000 in cash.
• Investor B invests half (S$50,000) in the ETF, and the other half in cash.
• Investor C is more conservative, allocating just S$20,000 to the ETF and S$80,000 in cash.

Between Apr 9 and Jul 24, the STI surged 25.9 per cent, rebounding strongly from earlier declines due to Trump’s tariff announcements.

Now, let’s assume all three investors stayed invested during this entire period. Despite holding the same ETF, their results would differ significantly due to their asset allocation.

Since cash typically earns a negligible 0.05 per cent in annual interest, we’ll assume it contributes almost nothing to returns.

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Here’s how the numbers play out:

• Investor A (90 per cent invested) earns a 23.3 per cent return.
• Investor B (50 per cent invested) sees a 13 per cent return.
• Investor C (20 per cent invested) ends up with just 5.2 per cent.

This simple example clearly shows how being more fully invested during a market rally can significantly boost your capital gains.

Even modestly allocating idle cash can improve outcomes. For instance, if Investor B had placed S$40,000 of his cash into corporate bonds yielding 3 per cent, his overall return would rise to 14.2 per cent, instead of 13 per cent.

The bottom line is that being 90 per cent invested can deliver dramatically better returns than staying mostly in cash. Your asset allocation matters – and staying invested is key to capturing upside when markets rally.

Pick the right stocks to improve returns

Of course, the previous example assumes the investors only held the STI ETF in their portfolios. But how about individual stocks?

Take Singapore Technologies Engineering (STE), for example. From Apr 9 to Jul 24 this year, STE’s share price surged 40.6 per cent, far outpacing the STI’s 25.9 per cent gain over the same period.

Good returns are not restricted to blue-chip stocks. Smaller companies can sometimes deliver even more impressive results.

One standout is Food Empire, a maker of three-in-one coffee. Its shares nearly doubled during the same timeframe, jumping from S$1.12 to S$2.41.

So, if your portfolio included high-performing stocks like STE or Food Empire, your overall returns could have been significantly higher than if you had only invested in the STI ETF.

Waiting for the crash

Meanwhile, some investors may feel the urge to cash out during a rally, hoping to lock in profits before a potential crash. They plan to sell high now and buy back later when the market drops. It sounds like a smart move on paper – but in practice, it’s much harder to pull off.

The truth is, you could be waiting a long time for that crash. Bull markets tend to last much longer than bear markets.

In fact, according to data from Bespoke Investment Group, the average S&P 500 bull market lasts 1,011 days, while the average bear market lasts only 286 days. That means bull markets typically run about three times longer than bear markets.

So, if you’re sitting on the sidelines in cash, waiting for the next downturn, you could end up missing out on years of strong gains. That’s why it often makes more sense to stay invested, especially if the companies you own continue to deliver healthy growth.

While there will be periods when there will be downturns, in the long run, time in the market beats trying to time the market.

Don’t forget dividends

Staying out of the market doesn’t just mean missing potential capital gains as share prices climb. It also means forgoing valuable dividend income while you wait on the sidelines.

STE is a great example of why that matters. Over the past decade, STE’s share price rose 166.1 per cent, climbing from S$3.32 to S$8.86. But that’s only part of the story.

During the same period, STE also paid out S$1.48 in dividends per share. When you include those dividends, your total return jumps to 210.5 per cent, a significant boost.

In terms of annualised performance, STE delivered a 10.3 per cent compound annual growth rate (CAGR) based on share price alone. Add in dividends, and the CAGR rises to 12 per cent.

This clearly illustrates how dividends play a powerful role in enhancing your long-term investment returns – not just as a bonus, but also as a meaningful contributor to wealth growth.

The importance of keeping some cash

Some investors believe it’s best to be 100 per cent invested at all times to maximise returns, rather than letting any cash sit idle. But that approach has its drawbacks.

First, a fully invested portfolio can experience sharp swings during periods of market volatility. Watching your entire portfolio fluctuate wildly isn’t easy; it can lead to emotional, knee-jerk decisions.

Second, having some cash on hand gives you the flexibility to act quickly when unexpected opportunities arise, especially during a sudden market downturn.

If you’re already fully invested when markets crash, you’ll be forced to sell other stocks, likely at a loss, just to free up cash. That means selling at exactly the wrong time, when prices are falling.

For these reasons, it’s wise to keep a portion of your portfolio in cash. This gives you the stability to ride out market volatility and the firepower to seize opportunities when they appear.

Get smart: Smart portfolio management is key

The secret to building attractive long-term returns may sound simple, but it’s incredibly effective. Invest the bulk of your portfolio in strong, growing companies, and hold them for the long haul.

Not only will you benefit from capital appreciation over time, you’ll also enjoy rising dividends that enhance your total returns.

At the same time, it’s wise to keep some cash on hand. This gives you the flexibility to scoop up great bargains if the market suddenly takes a dip.

In short, smart portfolio management – balancing long-term investments with cash for opportunity – is the foundation for lasting success.

Stick to these timeless principles, and you’ll be well on your way to achieving investment results you can truly be proud of.

The writer does not own shares in any of the companies mentioned. He is portfolio manager of The Smart Investor, a website that aims to help people invest smartly by providing investor education, stock commentary and market coverage