5 Tips for Calculating Expected Return for Your Investments

Introduction

Investing in the stock market can be intimidating, especially if you’re new to the game. One of the most critical parts of investing is understanding how to calculate your expected return. Expected return means estimating the profit or loss that an investment is likely to give. In this article, we’ll share five tips to help you calculate your expected return and make sound investment decisions.

Focus on Your Goals

Before investing, determine what your goals are. Are you looking to save for retirement, pay for your child’s education, or purchase a home? Knowing your goals will enable you to keep track of your portfolio’s performance by comparing it to your initial expectations.

Consider Risk

Investments carry risk. The higher the risk, the higher the potential reward. When calculating expected returns, investors should factor in the risk associated with the investment. For instance, stocks are perceived to be riskier than bonds. As such, expected returns for stocks are higher than bonds.

Use Historical Data

Historical data is an essential tool for calculating expected returns. Average annualized returns for various investment types can be determined by looking back at their long-term performance. However, it’s important to keep in mind that past performance doesn’t guarantee future performance.

Factor in Expenses

Expenses, such as commissions, fees, and taxes, are an essential part of investment. These costs reduce the expected return on investment. Factoring in the expenses is necessary to get a clear picture of the actual return on investment.

Think Long-Term

Investing for the long-term is a crucial part of calculating expected returns. Short-term investments may give you quick profits, but they’re riskier in the long run. Invest in stable and safe companies to ensure your investment portfolio has steady returns in the long-term.

Conclusion

Calculating your expected return is crucial for any investor looking to make informed decisions. To recap, focus on your goals, consider risk, use historical data, factor in expenses and think long-term. These tips will give you a better understanding of how returns are calculated and ultimately help grow your investment. By practicing these good habits, you’ll be well on your way to achieving your investment goals.