Investment Return Is More Complicated Than Cash On Cash

You cannot know how your investments are doing by looking at the growth rate compared to the money invested.  You invest far more than money in many situations and that extra is difficult to account for.

Years ago I decided to make a list of all the elements that people bring to an investment and those for which they are punished if they want them.  Money is obvious and sometimes risk is too.  Time matters a lot.  The idea is that investors and the people who supply the yield trade values.  I supply money and 5 years of waiting, the bank gives me a low rate of interest because I want a guarantee.  If I wanted to wait only one year they would pay much less.  Money plus time invested in exchange for low risk and a low rate of return.

As I recollect there about 40 factors. Things that I will invest and expect to be paid for.  Money, time, risk, skill, some special knowledge, connections, the ability to invest above some minimum threshold, the ability to accept a highly taxable income, day to day management.  Things that I want that the other side does not want to pay me for.  Guarantees, low tax rate to me high cost to them, liquidity, legality, and small investment amounts.  There are more. Fashion is the most common.  Without fashion as a value, no one could sell limited partnership units in a movie.

One investment that is always overlooked is supervisory time.  If I have purchased a two-decision investment, I must know when to get in and when to get out.  These must pay more than a Buffett-like investment where the ideal holding time is forever.  How much time do you spend tracking the performance?  How much time studying financial reports, government actions, the world economy, competitors?  How much time listening to pundits or reading newsletters?

How much could you have made if you had used that time to advance your profession, your business or the well-being of your family?  You would have had to buy something less volatile security and looked only once in a long while.  If you are a professional and can bill $300 per hour, spending four hours a week with your investments costs $60,000 a year.  How much better is the difficult investment compared to an ETF or Index fund?

Be smart.  Value all your inputs before you assess the rate of return.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  866-285-7772

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