Are you getting a good return on your investment? The answer varies from person to person. Different individuals have different investor profiles and financial goals. Several other factors also need to be considered. Ultimately, there will never be a single number that all investors can point to and call a “good return” unanimously. However, the questions below can help you determine whether the rate of return you are getting is right for you.
- Does it outpace inflation?
A good return allows you to preserve the value of your capital. Inflation decreases the value of currency over time. As prices increase, you would need more funds in the future to pay for items which cost you less today. Therefore, earning a return that is higher than the rate of inflation not only allows you to grow your capital, it also preserves its value.
- Will it help you meet your financial goals in a reasonable amount of time?
You invest to make money in order to meet a certain financial goal. It is, therefore, a reasonable expectation that your investments will get you to where you need to be in a reasonable amount of time. For example, if you have capital of Kshs 100,000 and want to have earned Kshs 1,000,000 in 18 years in time to pay for your child’s college education, you need to earn an annual return of about 13.5%. If your investment earns you less, you will not be able to achieve your goal.
- Is it comparable to the market average?
What could have been a good return in a previous era may no longer be thought of as good in the present. As market conditions fluctuate and standards are redefined, what was once “high” may be normal now, or vice versa. If, for instance, a leading benchmark index such as the NSE shows a net annual return of 7%, then an investment earning you 8% is doing well. At the very least, your investments should be able to keep pace with prevailing market rates.
- Is it comparable to similar assets within your asset class
You may be tempted to compare interest rates across non-related assets. However, this is similar to comparing apples to oranges. It makes more sense to ask whether your investment is earning similar returns to others within the same asset class. For instance, if you invest in an MMF, it should be one whose returns are above the average of all the other money market funds.
In conclusion, the rate of return should not be your only consideration when creating an investment plan. You should also think about the amount of risk you are willing to stomach, the capital available and your financial goals. Whichever assets you choose, remember that time and compound interest are your friends. Investing with a long-term view will give you the most rewarding results.