What is the return on investment?

Core points

The rate of return on investment is the ratio of the return on investment to the cost.

The factors that affect the return on investment mainly include investment risk and liquidity.

The potential return on investment varies with different types of investment.

Detailed explanation of concept

The rate of return on investment refers to the ratio of income to cost of investment, which is generally expressed as an annual percentage, that is, what we call an annualized rate of return. Marx once said that capital dares to trample on all human laws for the sake of 100% profit. The 100% here refers to the return on investment.

The factors that affect the rate of return mainly include investment risk and liquidity. Income and risk go hand in hand. If you want to get a high return, you often have to take high risk. And the less liquid investment varieties, often need to make compensation in terms of return on investment. For example, the rate of return on time deposits is often much higher than that on demand deposits.

Rate of return on common investments

Bank deposits / money funds: zero or low risk, return on investment is usually less than 3%.

Stock investment: high risk and high return. Take the performance of the NASDAQ as an example, the annualized return over the 10-year period from 2011 to 2020 is about 17%. However, if you enter the market at a high position, there is also the possibility of losing money in the short term.

Fund investment: high risk and high return. Some star fund managers have a long-term annual return of more than 15%, but there are also funds with negative investment returns.

How to improve the return on investment

First of all, it is necessary to control the risk and prevent the loss of principal. Buffett's annualized return on investment over the past few decades is more than 20%, which is inseparable from the three major investment principles that he adheres to: first, to keep the principal; second, to keep the principal; and third, to keep in mind the first and second principles.

At the same time, we should strengthen our study. People can never earn money other than cognition, and investment is also the realization of cognition. Through continuous learning and broadening their knowledge, it is possible to improve the rate of return on investment. The series of investment courses in Futu classroom is a good choice for learning.