Debt Free Article
Top Ten Mistakes People Make When Investing
Mistake #6 (Part2)
Focusing only on your return
Continued from…
Expected return for the future
Even though it is relatively easy to calculate an investment’s return over the past year, it is quite another thing to try and figure out what an investment will return over the next year. – or over the next several years for that matter. For most investments, the return in the previous year will be a little or no help in predicting the next year’s return. None the less, while past performance is no real guarantee of future performance, longer-term historical data may at least provide an estimate (with an acceptable range of course) of an investment’s (or portfolio’s) future expected return.
Investment pros sometimes estimate future return by using the average return an asset has produced over a ten year, twenty year, or even longer period of time. To figure out an asset’s average return, we simply add the yearly returns for each of the years we are reviewing and divide that result by the number of years. Based on history, this return is what we expect to get on average if we were to invest in that asset.
Because the primary goal of investing is to maintain the purchase power of your capital, it is useful when guessing future returns to consider only the return in excess of inflation. This return is called the real rate of return.
So, as you can see in this article, there are other things, many of them pretty darned detailed, to consider when you are investing based on rate of return. DO not make the mistake of only considering your return when investing. It is one of the top ten mistakes people who are investing their money make on a regular basis.
Remember, even tough return is an important aspect of determining whether an investment is a good one for you, it is just as important to consider the risk involved with any investment too. Each type of investment you make carries a different level or type of return – and risk.
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