Speaking in previous articles about how passive investing tends to win over active investing - and also mentioning that more than 80% of hedge funds lose to passive investors - I have not yet written in numbers what kind of investor return we are talking about. So in this article we will talk about investment income. Below is a table of profitability of American investors in the period 2004-2013 (i.e., taking into account the global crisis of 2008):
So we see that passive investment in American market(S&P500 index) has brought an average of 7.4% per annum over the years. Close to this result came shares of world companies, which gave an average of 6.9%. Bonds almost doubled during this period, yielding 4.6% per annum. And only then, with a noticeably lower result, is the investor's income - only 2.6%. Moreover, the most interesting thing is that according to the rating calculation method, this is not net profitability, but taking into account positions (equity) that were not closed at the time the statistics were collected. For example, it could be a purchased futures, the expiration of which came later than the statistics were collected.
If we take a fully fixed income, then it turns out to be at the level of 0.6% - i.e. such investment income is inferior even to inflation! Moreover, according to statistics, not since 2004, but since 1993, the difference will increase even more - the shares of the American market gave an average of 8.2% over this period, and average income the investor was 2.3% (the return on gold was due to a sharp rise in 2001-2011 - however, in fact, gold is a commodity asset, not much different from, for example, wheat. According to Buffett, gold does not produce anything, although it still has its advantages) .
However, passively investing in the US market would yield results like the table below. Those. a closer look shows that the return on investment over a 10-year period over a distance of 80 years could range from -1.2% to 18.30%. Investment income on a 20-year period - from 2.60% to 17.40%, respectively, instead of the 8.2% indicated in the table above. To stabilize the results (no one wants to be at least a small loss after 10 years, adding to it losses from inflation) and serves investment portfolio.
Investment or speculation?
But why does the average investor lose about four times the market result (10.5% per annum)? I will try to highlight a number of reasons.
Overconfidence
Such an investor (actually a speculator) is confident in his knowledge and believes that he will be able to predict, if not all, then the main ups and downs of the market or selected securities. Maybe he trusts technical analysis, or maybe actively following stock news on the Internet or on TV. But the end result in most cases turns against the investor and in the long run consists of a ballast of spent commissions for operations and incorrect decisions taken. Which, as a rule, more than true. According to various studies ( Do Individual Day Traders Make Money? May 2004; The Cross Section of Speculator Skill Evidence from Day Trading, May 2011) no more than 15% of intraday traders make a profit per year - and almost none of those who were lucky could repeat the high profitability next year.
False data extrapolation
It is human nature to draw conclusions - and try to find a pattern where it is absent. In principle, any random data set can be described by some average curve, which will not reflect the further behavior of the asset. In addition, the investor usually attaches more importance to the data for the latest period. Extrapolating the continuation of growth, he risks quickly being in a drawdown; extrapolating the fall, it may miss a favorable moment for buying assets cheaply.
Loss aversion
From psychology it is known that negative events have a stronger influence on a person than positive ones. According to some estimates, to compensate for the negative emotions from the fall of the market, you need twice as many positive ones. In fact, the average investor does not agree to tolerate a drawdown, especially a protracted one. Often this leads to a fear of investing in stocks and excessive conservatism; It helps to overcome this by understanding that the value of a share is ultimately determined not by the behavior of its quotes (random and volatile in a short period), but by the value and condition of the business that the share issuer conducts. The profitability and debt of the company, as well as the return on equity, are the fundamental factors that will lead the patient owner of the stock to the final result.
Variability in risk tolerance
Although today you can find different methods for determining your tolerance for capital drawdowns, it is quite clear that this term is emotionally dependent and changes with changing market conditions. In real life, conservative investors can buy stocks just as quickly when the stock market rises as aggressive ones, and when the stock market falls sharply, the most aggressive investors become surprisingly reasonable and cautious. Other factors that influence risk tolerance are gender and age—women and the elderly are more wary of their counterparts.
Below is the performance of various assets since the early 70s (dividends and coupons are reinvested, commissions are not taken into account):
The graph clearly shows that all the assets presented provided investment income above inflation, however, depending on the instrument, it fluctuated widely. Thus, from 1972 until the mid-1980s - the crisis period in the United States - commodity assets provided a significant better profitability, and since 2000 have lagged behind US and global equities. You can track the current movement of assets using the following table:
https://novelinvestor.com/asset-class-returns
It clearly shows that various instruments in different years turned out to be either at the top or at the bottom of the table. Real estate performed best on average, with the S&P500 roughly in the midline. During the crisis years - the early 2000s with the fall of dot-coms and 2008 - bonds that were located at the bottom of the table in a growing market (along with cash) felt very good.
Taking the average return on investment across all instruments (including dividend reinvestment and excluding commission fees), at the time of writing, we get about 6.72% per year, which is almost equal to the average return on global stocks from 2004 to 2013. Excluding cash, the average value for eight instruments will already be 7.38%.
With a favorable economic situation, the use of high-yield bonds and a low asset correlation, you can theoretically get another 1-2% higher. Compare this with the recorded result of 0.6% per year… of course, you need to take into account that in some years (for example, 2002 and 2008) the portfolio can sink quite strongly.
What to do in this case? The answer is simple: rebalance. But if a drawdown of about 40% is uncomfortable for you, then this should be taken into account at the stage of portfolio formation: the table shows that HG Bond has not sagged by more than 2% over the years. But in terms of yield, among other instruments, HG Bond was often at the bottom of the table, confirming the rule: less risk - less profitability. So in this case, get ready for a more modest end result.
Influence of fund commissions and previous leaders
When choosing funds in the paragraph above, it is important to take into account one circumstance that affects the return on investment - commissions, which for ETFs can vary from 0.05 to 1%. At first glance, the difference is insignificant, but let's look at a long distance of 30 years. At average return about 8% per year, the initial amount of $10,000 per year and regular replenishment (by $5,000 per year, and this number increases annually by 5%, compensating for inflation) with a commission of 0.25% in 30 years, you can count on 533 000 dollars; with commissions of 0.9% - only for 439,000, i.е. nearly $100,000 less (ten times the amount originally deposited).
The costs are noticeable even in shorter periods. The investment return of all types of US stock and bond funds over 10 years (if we take the period 2003-2013) will be determined not by their composition, but by commissions - low-cost funds in all cases will give a return of about 1-2% per annum higher than their counterparts. Those. the results relate both to the size of the company (large, medium and small firms) and their types (growth, value, mixed type). The same is true for bonds - you can consider high-yield, short-term and medium-term bonds, as well as corporate and government bonds.
Separately, it is worth mentioning the leaders of the industry. Often, an investor, both during the initial compilation of a portfolio and in the process of investing, has a desire to invest in funds that have recently shown the maximum yield, which sometimes jumps up to 20-30% per annum and even higher. It could be like passive funds in a very favorable market situation, and active mutual funds. However, researchers since Sharpe (1966) and Jensen (1968) have seen very little evidence that past returns can have any bearing on future returns.
For example, Carhart (1997) announced that there was no evidence of persistent high fund returns after adjusting for Fama's and French's common risk factors. In 2010, a 22-year study showed that it is very difficult for an actively managed fund to consistently outperform a passive index fund. As an example, Manager William Miller's Legg Mason Value Trust has outperformed the S&P 500 stock index for fifteen(!) years in a row, until it lost all the advantage accumulated over the index in three short years.
Such managers are sometimes jokingly or sarcastically called "lucky monkeys", alluding to the famous experiment with the monkey Lukeria, who chose the dart throwers. Consequently, when investing, it is not recommended for an investor to focus on the current high profitability of funds (rather, on the contrary, it is more appropriate to avoid investing in them). Below is a chart from D. Bogle's book The Smart Investor's Guide:
The impact of replenishment of the balance
Finally, periodic replenishment of the balance is very important, which can be done, for example, along with rebalancing. Studies have shown that an income level of $10,000 with an annual return of 8% and an increase in the amount of replenishment by 5% per year can achieve almost the same result as an investment level of 4% with an annual increase in the amount of replenishment by 10%:
conclusions
A competent portfolio approach allows you to increase the yield from 0.6% to an average of 10% per year, i.e. about 15 times. On the plus side, we get passive investment, in which the portfolio needs to be touched only once a year to restore the original balance or minor changes in composition. The downside is the likelihood of a strong drawdown in certain periods, and therefore, it is necessary to proceed from the freezing of invested funds, which make sense to withdraw only in a growing market. However, such an opportunity is only available when investing through a foreign broker - in programs investment insurance the freezing was taken care of by the company itself.
An alternative could be fundamental analysis individual issuers (shares) and investing in them - with many years of experience, you can thus receive income slightly higher than the market. Not much, but it takes a lot of time for analysis and subsequent tracking of the issuer. As a result, even consultants who are well versed in such a tool usually create passive portfolios for their clients, which are much easier to manage.
Elena Pazina
Updated: 2019.07.08
Font A A
One indicator of a country's economic health is the well-being of the middle class. It is its representatives who provide the lion's share of income from the sale of cars, real estate, retail. Over the past thirty years, the middle class has been actively forming in our country as well. World practice shows that among its representatives are very popular additional sources earnings, including investment income. Citizens become rentiers, open bank deposits, invest in securities. The editors have collected information about the methods passive income, structure, features.
Investment Characteristics
Among domestic economists, as it turned out, there is no agreement on a clear definition of the concept of "investment". The word "investment" is most often used when we are talking about a long-term investment of money in order to make a profit in a few years or have an annual income for a long time.
Accordingly, investment income is profit received with the help of funds withdrawn from their current turnover, invested in any direction in order to obtain additional income.
Source examples passive income quotes Gleb Zadoya:
There are three types of investments that can make a profit:
- real - money is invested in tangible (real estate, equipment, goods, etc.) or intangible (licenses, patents, and so on) assets;
- financial - purchase of securities, opening of deposits, etc.;
- intellectual or intangible - investments in objects of intellectual, cultural property.
Investment classification
The return on investment is called total investment income.
Its structure consists of two components:
- current profit - interest payments, dividends, etc.;
- capital gain or exchange rate income - an increase in the initial investment.
When planning investments, one must remember that not only profits are possible, but also losses. This applies not only to a decrease in the amount of dividends, the absence of interest payments, but also to a decrease in the value of invested funds.
For example, 1000 shares were bought for 100 rubles. The invested capital amounted to 100,000 rubles. In two years, the value of the securities fell to 90,000 rubles. This means that the investor, despite the payment of dividends, suffered losses.
Gleb Zadoya briefly compared the types of investment in his video:
The income from investing money must exceed the rate of inflation, only in this case the investment is profitable.
Types of investment income
There are three main classifications of types of investment income. The first is based on the types of investments made, the second - on the duration of the investment, the third - on the regularity of payments.
Classification by type of attachments:
1. Real investment make a profit in the form of:
- increase market value investment objects;
- rent;
- income from production, which imply not only the sale of any goods, but also the shares of the enterprise.
2. Financial investments allow you to earn on:
- interest payments, for example, on loans, bonds, deposits;
- dividends;
- quote growth.
3. Intangible investments pay off thanks to:
- various license fees or royalties;
- profit from development innovative technologies, productions.
When investing in the development of innovative industries, the profit can be in the form intangible assets such as access to free use technologies and more.
Profit from investing money can be obtained:
- Fast. Short term investments lasting from a few minutes to weeks, which are associated with a high risk of loss.
- In a few weeks, months, with medium-term investments in mutual funds, banks, and so on.
- At long-term investments investment income comes in a few years (more than three).
According to the multiplicity and type of payments, investment income consists of:
- regular dividends (percent);
- capital growth;
- total profit combining both options.
Knowing the various ways to make a profit from investing money, the investor selects the option that is most suitable for himself.
Someone prefers to develop production in order to get a stable working business that brings dividends in 5-10 years. And someone - to speculate in the market Forex, receiving monthly payments.
When choosing an option for investing money, it is worth considering not only the available volume free funds, but also the personal characteristics of the future investor.
The maximum profit from investing money is associated with a huge risk of loss. How safer investment, the lower the profit.
So the interest rate on ruble bank deposits is 7-9% per annum, but the amount up to 1,400,000 is protected by state insurance. Payments in mutual funds reach up to 30%, but there is a risk of losing investments.
Taxes on investment income
Property tax
Investment income is taxed at the standard rate for personal income tax - 13%, but there are small nuances.
Taxation scheme for investments in real estate:
Tax on investment in securities
Tax deduction
For investments in securities:
For owners of individual investment accounts, there is an opportunity to receive a 13 percent tax deduction:
Benefits for investors
For investors investing in the development of production, the creation of new technologies, state and regional preferential programs are provided.
Here is an example tax incentives for investors in the Novosibirsk region:
The declaration is submitted annually by April 30 to the regional inspection at the place of registration. Deal with general questions budget payments video will help:
Refine tax rates, features of filling, it is necessary from the inspectors. The fact is that in the inspections of different cities and regions of the Russian Federation, the points of view on paying taxes differ, much is regulated by internal instructions.
Regardless of the amount of money invested, you can always choose a tool that guarantees a stable investment income. The main thing is to study the issue and pay taxes on time.
Analysts of CB "Renaissance Credit" compared the profitability of the main investment instruments, which are most often used by Russians, for the period from 2011 to 2015. As a result, the absolute leader was dollar bank deposits. Their cumulative return for five years, expressed in rubles, amounted to 209%. This indicator is due to the large-scale depreciation of the ruble that occurred in 2014-2015. According to the authors of the study, the success of using dollar deposits depends, first of all, on the ability of an investor to predict the dynamics exchange rate and his willingness to invest in the long term.
Ruble bank deposits would have made it possible to earn about 4 times less over the past five years - about 49.5%. However, compared to dollar deposits this instrument has a more stable profitability. The authors of the study believe that it is also the most accessible and safest asset, since it does not require large investments and is insured by the state for 1.4 million rubles. There is also a tool that combines the best characteristics of both types of deposits - a multi-currency basket of deposits, experts say. Based on the results of five years, this investment strategy would make it possible to earn at least 129%.
Relatively high returns gold, despite the fact that after the end of the world financial crisis In 2008-2009, prices for this metal are gradually declining. In 2012-2013, investments in gold would only bring losses, but already in 2014, the precious metal confirmed its status as a defensive asset on the Russian financial market. As a result, its profitability for 5 years was 86%. Analysts warn that the success of investing in gold, as in the case of foreign currency deposits, depends on the ability to predict the future dynamics of the markets and the willingness to invest for a long time.
Real estate in five years would bring the investor 73%. With the exception of 2015, when investments in this asset were unprofitable, real estate showed a relatively stable increase in profitability. Experts believe that the main disadvantages of this investment strategy are the high requirements for initial capital and the low return on investment in an apartment.
mutual funds turned out to be the least stable instrument in terms of profitability. In 2014, this asset was unprofitable, but already in 2015 it turned into a plus, allowing investors to earn 23.8%. Nevertheless, according to the results of five years, mutual funds would have brought the lowest income compared to other instruments - about 14%. Experts note that the study examined the most simple strategy investing in mutual funds, which involves investing in funds that have shown the highest return in the past. By choosing a more complex strategy, the investor could earn more, but this requires special skills and knowledge, as well as an understanding of the situation on stock market.
Sergey Suverov, head of the analytical department of Russian Standard Management Company, believes that in current year don't rely on high returns on bank deposits. “The trend towards the strengthening of the ruble and low rates on deposits, they are unlikely to make good money on dollar deposits, and ruble deposits will not be able to show a decent return due to high inflation, ”says the analyst.
According to Suverov, a real alternative bank deposits in 2016 may become individual investment accounts(IIS), OFZ and mutual funds of shares. “IIS is a long-term instrument, which, moreover, can be used to receive a tax deduction. Money from this account can be invested in stock market instruments and debt securities - for example, in the same OFZ. By the way, you should pay attention to government bonds, because in long term The Central Bank will cut the key rate. Equity mutual funds are interesting because the securities market will grow as oil prices recover,” commented Suverov.
Andrey Shenk, an analyst at Alfa Capital Management Company, believes that the main competitors of deposits in the next few years are debt instruments, which will grow in price as inflation slows down and the Central Bank cuts the rate. “The yields of many OFZ issues are already at the level of 9.2-9.3%. Considering that now there is a tendency for inflation to slow down and the market expects a decrease key rate Central Bank, these issues will still be revalued. Demand for government bonds will grow. Corporate bonds of the first echelon are also very interesting. The yield of some securities from this segment of the debt market is already higher than the rates on deposits, ”said the financier.
- - The only one licensed by the Central Bank of the Russian Federation. invested $20,000
- - Best. Works since 1998. invested $20,000
- - It Swiss bank, with access to Forex! 18 000 $
- I have been working with him since 2007. invested $10,000
- - 1500 USD as a bonus. invested $10,000
- - the best cent account. invested $8000
- - For scalping only he AND EVERYTHING! 8000 $
- - $30 GIVE ALL NEW! invested $5000
- - $30 GIVE ALL NEW! invested $5000
- - IT'S NeftepromBank. invested $5000
- - I use it as binaries through MT4. Invested $5000
And now how to make money, we are discussing everything in a closed group, more precisely in secret forex forum ! There are a lot of traders, financial bloggers, brokers and newbies! We discuss what works and what doesn't! Join us, the more of us, the easier! See example of personal income
In a broad sense, income is the receipt of money or other material assets during the course of any activity.
However investor income in the broad sense of the word, it can be formed not only from material values, but also from non-material ones.
Investor's income from direct investment
When , the investor's income consists of two main parts. From financial and material.
As a financial part, this cash received by an investor as a result of the sale of his share in the company to a potential strategic investor, co-owner of the company or the sale of the company on the stock market as a result of an IPO.
In the material part investor income there may be ownership of movable and real estate, equipment, licenses and patents.
Investor's income from financial investments
When making financial investments, investor income based on the risk-free rate.
AT Russian Federation the size of this rate is now at the level of 8 percent per annum, this is a guaranteed percentage minimum income for an investor in the securities market.
At financial investments in bonds, companies attract private investors at slightly more attractive interest rates of 10 to 15 percent per annum.
Thus, companies encourage the investor to invest not in risk-free bonds, but in bonds of other issuing companies.
When in stock various companies, investor income is formed on the basis of financial results company, in other words based on its profits. This happens because the shares give the right to shareholders to participate in the distribution of profits.
That is, the more successfully the company completed the current fiscal year the greater its profit, the more investor income .
Return on investment on invested capital is determined in several ways, depending on the basis of measurement. Capital can be invested in the real sector of the economy or in the financial sector.
Assessment of return on investment on invested capital in the real sector of the economy
Many investors invest in assets at the same time real sector economy and financial instruments. The tool for analyzing the profitability of such investments are indicators:
- Return on investment ratio (ROI);
- Return on invested capital (ROIC).
The return on investment ratio shows the return on invested capital in the business at the current moment and is regularly assessed in the course of the activity of the invested object.
It is defined as the ratio of the difference in income minus production costs to the total investment in the business as a percentage.
- P- gross income from investments;
- CF - production and circulation costs;
- I - total investment in the business.
Full business investment includes equity and long term duties invested object:
Where:
- Wc - equity;
- Wr - long-term liabilities.
This indicator reflects the effectiveness of management investment capital, according to which the investor evaluates the work of the management of the invested object. A positive performance assessment occurs when ROI > 100%, which means that the investment has paid off and is making a profit. The size of this profit and the dynamics of its change serve as an assessment of the effectiveness of the company's activities.
For example:
- The equity capital of the invested object is 12.5 million rubles and 14 million rubles at the beginning and end of the year.
- Long-term liabilities, respectively: 2.5 and 4 million rubles.
- Gross income at the beginning and end of the year amounted to: 65 million rubles and 78 million rubles.
- Production costs, respectively: 44 and 51 million rubles.
Then ROI, in accordance with formula (1), at the beginning and end of the year will be: 40% and 50%, i.e. the return on investment ratio increased by 10%, which indicates the high efficiency of the company's management.
Another indicator of the return on investment on invested capital is the ROIC (Return On Invested Capital) indicator - translated from English as “return on invested capital”, and in fact, the return on invested capital.
It is defined as the ratio of net income to invested capital in the core business of the investee.
- NOPLAT - net profit cleared of dividend payments;
- Invested Capital - capital invested in the main activity.
In Russian economic terminology, this is an indicator of the return on investment, but only those that are invested in core activities, that is, the return on investment in fixed capital. Fixed capital in this case means fixed assets plus net other assets with an amount working capital for the main activity. A prerequisite calculation of this indicator is that the net profit created only by the capital that is in the denominator of this indicator is taken into account. Sometimes, in case of difficulties in isolating the fixed capital from the total cost and determining the profit created by it, they resort to a simplified calculation, dividing the entire profit by the cost of capital. If the size of non-fixed assets is small, then the error of the indicator will be small and acceptable for analysis, but if this is not the case, then such an indicator cannot be trusted.
This indicator demonstrates to the investor the ability of the management of the investee to generate added value in comparison with other investee objects of the investor. For such assessments, a certain standard is used - the rate of return on investment in a competitive environment.
The rate of return on an investment is the ratio of the return received to the investment that generated that return in percentage terms over a specific period of time.
For example, an investor has three investable objects:
- 1 object at the beginning of the year received net profit in the amount of 32 million rubles, and at the end of the year 43 million rubles, with an invested capital of 30 and 40 million rubles, respectively;
- 2 object at the beginning of the year received a net profit of 50 million rubles, and at the end of the year 53 million rubles, with an invested capital of 45 and 49 million rubles, respectively;
- 3 object at the beginning of the year received a net profit of 12 million rubles, and at the end of the year 13 million rubles, with an invested capital of 6 and 8 million rubles, respectively.
Accordingly, ROIC at the beginning and end of the year:
- for 1 object 106.7% and 107.5%;
- for 2 objects 111% and 108%;
- for 3 objects 150% and 162.5%.
Accordingly, the rate of return is:
- for 1 object 107.5 - 106.7 = 0.8%;
- for 2 objects 108 - 111 = -3%;
- for 3 objects 162.5 - 150 = 12.5%.
If the investor considers the minimum allowable rate of return per 1 ruble of investment to be 10%, then 1 and 2 investment objects do not meet this requirement and the reasons for such a low return on investment should be analyzed, and for the second object an additional analysis of the decrease in investment return is required. If it is impossible to increase the profitability of 1 and 2 investment objects, the investor raises the issue of closing the investment project.
If the analysis of the return on investment is carried out over several years, then cash flows are discounted by the time the profitability is analyzed at the discount rate adopted by the investor.
The disadvantage of this indicator is that the management is focused on "squeezing" profits from investments in any way at the current moment, which can lead to a lag in the renewal of production and ultimately lead to a loss of the company's competitiveness.
Estimation of return on investment on invested capital in financial instruments
Return on investment on invested capital in financial assets consists of current and capitalized components.
Current income is defined as the difference between the sale price received at the end of the investment period and the purchase price security.
I = St - So
- I - current investment income;
- So - the purchase price of the security;
- St - income received at the end of the period (year).
For example, an investor purchased 10 shares at a price of 1,000 rubles at the beginning of the year, and at the end of the year, his income from the sale of shares amounted to 11,500 rubles. In this case = 11,500 - 10,000 = 1,500 rubles.
The ratio of current income to invested investments is called the capital gain or interest rate and is expressed by the following formula:
Where rt is the interest rate, and for this investment it is 15%.
Another indicator for evaluating the return on invested financial capital is called the relative discount. It is defined as the ratio of current income to income at the end of the period:
Or for our example: dt = 1500 / 11500 * 100 = 13%.
This indicator is also called the discount factor. The interest rate is always greater than the relative discount.
The total return reflects the increase in invested capital for a defined period, taking into account the redemption of the security.
The main indicator used in the analysis of total return is yield to maturity YTM, which is akin internal norm return on investment IRR, is the average effective interest rate at which the value of all income received by discounting is reduced to the value of the initial investment. Like IRR this indicator rather complicated to calculate, but below is the formula for a simplified calculation of this indicator:
- YTM - yield to maturity;
- CF - flow of current income from investments;
- Io - initial investment;
- n is the number of periods;
- N - payment to the investor at the end of the period.
For example, purchased 10 shares for 10,000 rubles bring annual income:
- CF = 1500 rubles per year;
- Io = 10,000 rubles;
The capitalization of 10 shares by the end of 3 years amounted to 1,500 rubles:
- N = 11500 rubles;
- n = 3 years.
YTM = 4500+(11500-10000)/3/(11500+10000)/2= 46.5%
Obviously, the yield to maturity is significantly higher interest rate, which allows us to assert the expediency of these investments in a financial instrument.
