For a person connected with investments and investments, it is important to know and evaluate the dynamics of profit. It is necessary to use such a method of determining the average profit, which gives the clearest picture of this indicator.
Instructions
Step 1
Observe and analyze the picture of profitability over the past 6 months. It is clear that stocks, commodities and other financial instruments cannot guarantee constant capital gains. It can fluctuate and be, for example, this: 17%, 5%, -3%, 37%, 51% and 7%. The exception is bonds, deposits and fixed income instruments.
Step 2
To describe the profitability, the average profit indicator is used, which is calculated by several methods, sometimes not always accurately. A simple or standard method for determining the average profit involves the use of calculating the arithmetic mean. For the indicators of profitability of the above example, it follows that the arithmetic average will be: (17 + 5 - 3 + 37 + 51 + 7) / 6 = 19. That is, the average monthly profitability will be 19%. Check if this is actually the case. Suppose you have invested $ 100. Then, in accordance with the aforementioned monthly return, you will receive an amount equal to approximately 284 rubles. In other words, with an average return of 19% over 6 months, you received 284 rubles at the end of the period with 100 rubles invested.
Step 3
Compare the results of your calculations with your real monthly profit. After carrying out simple calculations, you will find that the real capital at the end of the period was 263.77 rubles, whereas, according to the arithmetic method for determining the average return, it is 284 rubles, i.e. approximately 7, 1% more. It is so easy to be convinced that the standard method does not reflect reality and gives exaggerated figures from your investment activities.
Step 4
To really estimate the average profit for a particular period, use the formula for the geometric mean or proportional value, not the arithmetic mean. For this example, the average monthly profit as a percentage, if correctly calculated, will be: (1, 17 * 1.05 * 0, 97 * 1, 37 * 1, 51 * 1, 07) ^ (1/6) = 15, 8263%, not 19%, which is lower than the standard calculation. Having checked the reliability of this method by arithmetic calculations, you will make sure that you got a real value equal to 263.77 rubles.
Step 5
Use the experience gained in practice. Ask about the method for calculating the average profitability, for example, own assets. Keep in mind that interested organizations (from mutual funds to personal brokers) can take advantage of the situation and provide you with incorrect information, which is especially important when working with impressive amounts of funds.
Step 6
Correctly estimate your average profit for a certain period and be sure to clarify the method of determining this indicator, not allowing yourself to be deceived.
