Friday, 5 April 2013
A 5% return may end up being a better deal than a 20% return.
If one is able to get a 5% return in a month, we could argue that it is a better investment than one that earns us a 20% return over a two-year period.
The reason for this is that a 5% rate of return in a month is arguably the equivalent of getting a yearly rate of return of 60% (5% x 12 = 60%).
Likewise, a 20% return at the end of two years is arguably the same as only getting a 10% yearly rate of return. (20% / 2 years = 10%).
Of course, this argument is premised on being able to reallocate the capital that we had out at 5% for a month, at attractive rates in the preceding months.
But in theory, if you could reallocate your capital 5 times over a two-year period and each time earn 5% a month, it would still produce better results than getting a 20% return at the end of a two-year period.
The certainty of the deal is important. This allows for a quick and certain return