Common mistake - looking at absolute return and not relative return

Common mistake - looking at absolute return rather than relative return

Common mistake - looking at absolute return and not relative return

A common mistake in reference to yield
Hello friends, another post with tips and recommendations for investors, and this time I will present a common mistake that many investors tend to make when it comes to calculating returns - Looking at absolute return and not relative return.
Many investors tend to look at yields in absolute glasses, meaning how much return is expected in the specific investment channel.
What they do not do is test the relative, relative aspect of the yield, that is, compared to the yield obtained in other channels at the same time.
To illustrate, let's say a trader in the capital market in a given year plays from morning to evening in stocks. Seller buys, sells buys, and at the end makes a wonderful return of 6% per annum. Great isn't it? Maybe, but the question that should be asked is not whether it is absolutely great, but is it great In relation to passive investment in the index. What if in that year the Tel Aviv-35 index rose 5%, and all that made him an exceptional investor was one single percent above the return he would have produced had he invested in an ETF on the Tel Aviv-35 index? Or in monetary terms: what if his investment fund is $ 100,000, and any improvement in his annual profit was only $ 1,000. Did he really earn anything, given the amount of time he spent and the loss of the alternative income he had?
So maybe the capital market example is more intuitive for some people, but what about people who play in the real estate market? Many people enter a foreign city abroad, buy a property for $ 60,000 in the city center, fly to the property 3-4 times a year, arrange, furnish, brush, and deal with it continuously and regularly, all to improve the yield and get a wonderful rent of 7% , Which exceeds the normal rental yield in that city. This is definitely an impressive return that is worth all the hassle, right? Maybe, but maybe not really sure?
Perhaps precisely when comparing this investment For another passive investment in that city, It is no longer so certain that improving this yield is at all justified. It might have been possible, in exactly the same budget, and at that time, to invest completely passive investment in another property in the city, with minimum employment, and get an 5% return on investment.
In fact, the 7% return you expect to make on your investment should not be compared to 0% as many do, but to 5%, which is the usual alternative even in the city, and look at it with relative, non-absolute glasses. You have to check the yield difference and not the yield itself. And when it comes to a small investment of 60,000 $, the difference of 2%, is only 1,200 $ per year, with only the return flights 4 times already exceeding that amount.
The bottom line, for small investors, whose investment is relatively small, a two-percent improvement in return is not always worth it. When it comes to yields, it is never absolute to look at them in absolute terms, but you have to look at them comparatively, compared to the other alternatives available, and decide whether a particular direction that improves yield is worth all the hassle.

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Responses

  1. Great post that raises interesting issues about looking at yield. Certainly there is a return on paper that can look great, but in practice enough that there are two or three months in the year that the property is vacant due to the area being problematic, or having to evacuate tenants the dream yield is going wonders, and another property whose face yield was lower but stable, would be preferable to purchase. Thanks for the question!

  2. I think you should take into account the return on investment that the investor accumulates while investing. In a passive investment, in most cases, you will not learn enough about real estate or stocks. Learning is the one that should leverage you to grow and grow in the learning path you have learned

  3. Thanks for the post! But sometimes there is a greater investment in investment in the first year and after that the business runs relatively passively. So whether it is worth giving up 2% long-term return because the first year has more trouble

  4. This is true in principle, but in my opinion the current yield component is not the leading consideration in investment anyway, certainly in the sand. The consideration should be a potential increase in value and not a gap of 1% of other yield channels. And then it pays to sweat for assets that eventually go up by 50% and more in 4 years.

  5. As a real estate agent, you run for a long period of time
    This means that if in the first year you invested to get another percentage / two in return and it is supposed to offset you if the additional investment in the first year is offset to 5 or 10 years it is dwarfed

    Lee interferes with calculating the return of people who look at the price of the property against income and ignore additional expenses that go into the cost of the property or who forget that the income does not include expected annual expenses and the gross return is far from the net

  6. Precise.
    What enhances relativity is a model that is based entirely on passive income that requires no hassle at all, but relies on key professionals in their field.
    Thus, the sophisticated passive investor gives himself the time (which is the most valuable resource) to find the best deals and players that will add value to his finances and his finances.
    It's a model that generates a lot of potential for a lot of return in many separate investment avenues.