How To Make Financial Investment Decisions?
Ever thought about this?
To become Financially Independent, you must first need to make correct Financial Investment Decisions.
Here are some points to remember before making any financial investment decision:
1. Historical returns of asset
2. Sustainability of the asset in the market.
3. Capital Gains
4. Rate of return.
For beginners and non finance background, it is important to know the past returns of assets before making any Investments like in fixed deposits, equity, gold, real estate, etc.
If you see the past data of fixed deposits, it has shown Compounded Annual Growth Rate (CAGR) of less than 10%. While equities offer more than 15-20% in the long run. Considering gold in last decade it has generated a CAGR of 9.4%
But wait a minute, is this a correct way to assess your Investment?
If you are considering these returns as real returns you might not get a full picture of your Investment!
Interest rates are stated in different ways.
The rate of return which is quoted on the official sites, bank etc are quoted in terms of nominal returns. Nominal returns are the returns which are quoted before considering any expenses. It is also not adjusted for inflation.
Whereas real rate of return, it is the return adjusted for external factors such inflation, taxes, etc. It is important to consider the inflation while calculating returns, as inflation tends to reduce the value of money as time passes.
When the rate of inflation > the nominal rate of return, the real rate of return is negative.
Pro tip: Never get confused with nominal and real rate of return. One must consider whether the risk associated with the investment is appropriate given the real rate of return.