Many people, driven by the desire to create a passive income system – extremely important, by the way – choose to invest in assets that have a history of good performance or that are highly recommended. But do they identify the profitability in the investments they have made?
It seems like a question with an obvious answer, but it only seems that way: it is common for even experienced investors to have difficulties defining the profitability of their portfolios and, therefore, are surprised with results below expectations.
Investment profitability is the percentage ratio between the income earned and the amount invested in a certain financial product over a period of time, which we can also call investment return.
Analyzing profitability, especially in a basket of investments, is fundamental to ratify or revise investment strategies and can even impact the investor’s profile!
Without this analysis, investments take a path of uncertainty that leads to losses, but which can be avoided.
Therefore, BLOCKBR, a web 3.0 native company, is going to talk about the importance of profitability in investment analysis and how to improve it!
HOW PROFITABILITY IS CALCULATED
The profitability calculation is so simple that many people wonder how they have invested for so long without knowing if the investment is profitable! To be better analyzed on a daily basis, we must consider the three types of profitability.
ESTIMATED PROFITABILITY
It is the forecast given by the offeror of the financial product. For example, if you are going to invest 10,000 Reais in tokens of a soybean crop and the offeror estimates a 12% return, then the estimated return at the end of the period is 1,200 Reais.
NOMINAL YIELD
At the end of the period, the investment yielded 1,500 Reais. Compared to the 10,000 Reais invested, we have an effective return of 15% (income compared to capital).
REAL YIELD
Here enters an unwelcome guest: inflation.
If inflation during the investment period was 7.8%, this means that in order to buy a good that cost 10,000 Reais at the beginning, it would be necessary to have 10,780 at the end of the term. So the real return is 7.2% or 720 reals. This is the actual performance of the financial asset.
PROFITABILITY IS NOT PROFITABILITY
This is a common confusion even in companies, but it can be clarified in a simple way: if we talk about investments, profitability is the gross result of the investment, while profitability is the net result.
So, if we take the example of the soybean crop tokens and there is a cost of 80 Reais as a cost of operation, the effective profit of the operation will be 6.4% or 640 Reais.
PROFITABILITY IS NOT LIQUIDITY
Although this is another common confusion, they are not indicators that are in the same account, as we saw with profitability, because liquidity is how fast we can convert investment into cash.
We can have profitable investments with low liquidity – as in real estate tokens – or high liquidity – in the case of tokenized real estate funds.
HOW IMPORTANT IS PROFITABILITY
Profitability is the central goal of an investment strategy, whether the investor is bold or conservative. The historical performance, allied to the economic conjunctures, allow us to evaluate whether it is worth investing in the asset or looking for another one with a more attractive yield.
With this metric, it is possible to compare the performances of different investments belonging to the same class of financial assets that are in the investor’s focus.
This analysis is widely used when comparing stocks, because of the volatility of the product and the many factors that influence the companies’ performance. This way, the investor has more information and chooses the most attractive paper.
Moreover, he can evaluate the investment options that align with his investor profile and choose the one that historically has the best returns.
HOW TO GUARANTEE THE PROFITABILITY OF YOUR INVESTMENT
FOLLOW YOUR INVESTOR PROFILE
The investment profile traverses between the conservative and the bold, and each of them has its own range of investment options that meet the investor’s expectations.
Building an investment portfolio based on your profile is fundamental for you to optimize your market studies and make faster and more effective choices according to the risks you want to take.
If your focus is on earning a lot in the long term, for example, invest in products with this objective, such as business project tokens or insurance tokens, among other assets.
This way, you have a better chance of building a portfolio of financial assets that will bring the desired returns and help you gain confidence and risk more in the future.
DIVERSIFY YOUR INVESTMENT PORTFOLIO
This is one of the basic rules to enhance profitability: diversify the financial products in your investment basket. With investments of different terms, liquidity levels, and risks, we can evaluate and compare their behavior.
With this, it is possible to compensate my momentum in one financial asset with a better performance of another, and continue obtaining returns closer to those expected. We have an article that talks more about diversifying investments.
PLAN TO REDEEM IN THE LONGEST POSSIBLE TIME
One of the strengths of investments is the compound interest payment – the yields grow as one month’s gain is incorporated into the previous balance of the application. For this, it is essential to keep the application for as long as possible.
During the investment planning, consider keeping the amount invested for as long as possible. In this way, the gains will be growing – not to mention that in some products, there is a reduction or even exemption of taxes over time.
EVALUATE PERSONAL CONTINGENCIES
We often prioritize long-term investments because of the increasing yield with compound interest, the reduction in taxes, and to create the discipline to keep the capital invested.
It is a wise decision, but life always surprises and you may need the capital to meet an emergency or take advantage of a profitable business. Study your personal context carefully so that a rescue will cause as little harm as possible.
One option is to put a personal reserve amount into a short-term investment.
BLOCKBR Digital Assets
is a web 3.0 native fintech that brings together technological innovation and digital knowledge to transform physical assets into digital assets, in the process of tokenizing assets.
The supply of physical assets and tokenized financial assets, both current and new, is democratic and decentralized, which makes the way of investing safe, simpler and more efficient.
We enable, structure, issue and offer tokens on our platform and beyond. Be aware that tokens depend on feasibility and regulatory factors.
Do you want to tokenize your business or part of it? Do you have a business solution and does it make sense to issue your own token ?
