Finding a lucrative investment
Lucrative investment with performance: searched and found
After an investment has been made, the success of the investment must be measured and, if necessary, compared with alternative investments. This is done by means of a calculation of the performance or in German a determination of the value development.
What does performance mean?
In the broadest sense, the term performance is equated with the investment return or the relative investment success of a portfolio. In the narrower sense, it is understood more as a portfolio manager’s performance record compared to a benchmark. In capital market theory, on the other hand, the term is usually viewed as the risk-adjusted return on a portfolio or as the risk-adjusted investment return generated by the portfolio manager compared to a passive investment strategy.
The starting point for performance measurement is the calculation of returns over a specific period of time. The underlying definition of return depends on the respective objective in the context of the performance assessment. When calculating the (exact) return on portfolios, inflows and outflows of funds must be taken into account. In general, two different calculation methods are used to calculate performance:
- Money weighted rate of return
When using the value-weighted method (“money-weighted rate of return”), which corresponds to the internal interest rate in the investment calculation, the incoming and outgoing payments in the meantime are included in the income calculation by being discounted to the initial value.
- Time weighted rate of return
When using the time-weighted method (“time-weighted rate of return”), the overall period is broken down into sub-periods, the length and number of which are determined by the cash inflows and outflows that occur. In contrast to the value-weighted method, this method eliminates the effects on returns caused by capital movements.
Risk and return comparison: performance and volatility of different investment strategies
It is now important for the private investor to develop an understanding of the relationship between the return and the risks taken by looking at the performance of an investment. By determining the performance, it is also possible to compare two or more investments with each other. If this comparison is carried out continuously over a longer period of time, then it is a question of comparing the performance of investment strategies.
The strategic success factors of a long-term and lucrative investment
Numerous research and studies have shown that determining the investment strategy is by far the most important success factor for attractive long-term investment performance. Harry Markowitz, who received the Nobel Prize in 1990, was in charge of this. The investment strategy and its implementation (“asset allocation”) is responsible for 70-80% of subsequent investment success.
The equity ratio as a measure of the risk profile
In general, there is general agreement in finance today that the proportion of equities in a portfolio should be understood as a yardstick for determining the possible risk and thus also the expected return. The higher the share quota, the higher the expected future price fluctuations, but also the expected returns. Many studies and calculations have shown that a return on shares of 7-10% (depending on the market considered) can be achieved in the long term.
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