Debt Views

When compounding money, your personal rate of return can be a highly subjective thing. Spreading financial risk over many different investment vehicles is generally the key. There is a place for even high risk, high return investments.

Your personal rate of return refers to an investors ability to maximize the annual compounding rate of their portfolio. The way this is done by spreading risk and assessing opportunities based on that risk. Typically, high risk propositions are risky, but the way to play these propositions is to play off the odds.

The bulk of the portfolio, in any prudent investors estimation, should be made up primarily of illiquid quality real estate. The most basic example of an investment is the humble bank deposit, usually a fixed term deposit because the interest is slightly higher. This is also the safest investment of all because banks are guaranteed by the government. This humble investment model is used as a bench mark for many investors.

By looking at the level of risk a bank offers and the resulting return, you can get a clear perspective and vision, when comparing other investments. When you compare real estate to a bank deposit, real estate shines favorably. First it’s a tangible asset. Bricks and mortar can be insured. Second, providing you do not over capitalize, your return is made up of two segments. The rental and the capital gains. Historical rental returns on a mean average comparison is roughly 7% of the purchase value. The capital gains are also 7% This totals 14% Almost 300% more than the banks 5% Quite an increase. The risk rising slightly but really not disproportionately to the returns. The main thing is not to buy over priced real estate.

Maybe 10 percent of the portfolio can be used to buy shares or other exotic investment vehicles like options. Finally, 5% of the value of the portfolio can be used as “mad money” This is quite fun and you play this money aggressively. For example, you may have 5% of $300,000 to play with so you have $15000

This can be split into 7 different investments. Anything from Emu farming, to Alpacas, to Oil drilling start ups. The returns on these high risk ventures is expectedly high. If they pay off, they pay double or triple your investment. I have seen prospectus with promise of 10 times return on capital. Of course, you don’t expect to get your money back on all investments. But some can and do deliver. Some get through. Out of the 7 you may have broken even on 3, taken a 50% loss on 1 lost one completely but made a 1000% return on three. By the end of the year, you have added 25% equity on your entire portfolio, by dabbling in these high risk start ups. In the end, your personal rate of return is reflected by how prudently but aggressively you have compounded your folio.