Question

What is a good return for you? How do you know? Now that you have had four weeks of your portfolio please discuss what you have experienced and what markets are you trading in?

Answer 1

Solution :

A really good return on investment for an active investor is 15% annually. It's aggressive, but it's achievable if you put in time to look for bargains. You can double your buying power every six years if you make an average return on investment of 12% after taxes and inflation every year.

Return on investment, or ROI, is the ratio of a profit or loss made in a fiscal year expressed in terms of an investment and shown as a percentage of increase or decrease in the value of the investment during the year in question. The basic formula for ROI is: ROI = Net Profit / Total Investment * 100.

There are two buckets that investment products fall into and they are financial and non-financial assets. Financial assets can be divided into market-linked products (like stocks and mutual fund) and fixed income products (like Public Provident Fund, bank fixed deposits). Non-financial assets - many Indians invest via this mode - are the likes of physical gold and real estate.

Cash

Fiat currencies can depreciate in value over time. Burying cash in coffee cans in your yard is a terrible long-term investing plan. If it manages to survive the elements, it will still be worthless given enough time.

Bonds

From 1926 through 2018, the average annual return for bonds has been 5.3.%. The riskier the bond, the higher the return investors demand.

Business Ownership, Including Stocks

Looking at what people expect from their business ownership, it is amazing how consistent human nature can be. Also, since 1926, the average annual return for stocks has been 10.1%.

The riskier the business, the higher the return demanded.It explains why someone might demand a shot at double- or triple-digit returns on a startup due to the fact the risk of failure and even total wipe-out are much higher.

Real Estate

Without using any debt, real estate return demands from investors mirror those of business ownership and stocks. We have gone through decades of about 3% inflation over the past 30 years.

Riskier projects require higher rates of return. Plus, real estate investors are known for using mortgages, which are a form of leverage, to increase the return on their investment. The present low-interest-rate environment has resulted in some significant deviations in recent years, with investors accepting cap rates that are substantially below what many long-term investors might consider reasonable.

Keep Your Expectations Reasonable

There are some takeaway lessons from this. If you're a new investor and you expect to earn 15% or 20% compounded on your blue-chip stock investments over decades, you are expecting too much; it's not going to happen.

What makes talking about a "good" rate of return even more confusing for inexperienced investors is that these historical rates of return—which, again, are not guaranteed to repeat themselves—were not smooth, upward trajectories. If you were an equity investor over this period, you sometimes suffered heart-pounding losses in quoted market valuation, many of which lasted for years. It's the nature of dynamic free-market capitalism. But over the long term, these are the rates of return that investors have historically seen.