How Do Investments Earn Return / Profit?
When you start to invest, the money that you will invest is called capital. On the other hand the objects that you own, like a house, shares and Unit Trusts are what we call assets. So the money that you have is capital and the objects that you own are assets.
If the price of your assets increase over the period that you own them, your capital that you have invested into the assets will then also increase. You could also get certain assets, (that I call bounce assets) that not only grow in value, but also produce an income stream during the growth phase. The income stream could be means of interest payments or dividend payments if the companies perform well over a particular period.
If you combine the capital growth and the income that you have received from the particular investment, we call this the investment return or profit from the investment.
One thing that you will still have to fraction into your calculation to get the Net return is to deduct all of the possible fees you may pay on this particular investment. These will then give you the true return of the investment.
How do Investment planning and returns work together
The return on your investment, also called investment performance, is often expressed as a percentage over a certain period of time. Before one starts investing you would need to look at what kind of return or percentage of growth you would need in order to accomplish your specific investment goal.
In every investment that you enter into, you must always be realistic about the returns that that specific investment will be able to achieve over the period that you want to invest your capital for.
A very important aspect to keep in mind is that investment returns are not always guaranteed. When one looks at the past performance of an investment one must keep in mind that it is a great indication of the consistency of the fund. However this is not necessarily a great reflection of how the fund will perform into the future. But at least it’s a guideline to how well the fund has done up until that point.
All Video Clips and Pictures supplied by Allan Gray
July 19, 2014
Grant van Zyl