Introduction:
Can you double or triple your money using Compound Interest? Yes! Find out why by reading this article!
“The eighth wonder of the world is compound interest. It is earned by those who comprehend it, while it is paid for by those who do not. ‘Principles rather than rules’
The power of compounding money allows investors to build wealth over time. For many investors, a 10% annualized return isn’t exciting, but that 10% doubles every seven years. In 21 years, an investment portfolio that returns 10% annually will be worth eight times as much as one that returns 5% annually.
Over the past two decades, how many investors can honestly declare that they’ve grown their investment portfolio by eight?
With Compounding, Invest in Assets with High Expected Returns
The Yale endowment’s principal investment officer, David Swensen, is widely regarded as a modern portfolio theory expert. At an average yearly rate of 12.6 percent, it has outperformed endowment returns of 7.6 percent by more than 60 percent and outperformed the typical 60/40 stock/bond portfolio. Because of their high predicted returns, venture capital, technology, and private real estate are all essential components of his investment plan. Swensen turned $4.9 billion into $25.4 billion using this formula.
What Kind of Returns Can Be Expected?
An investor’s anticipated profit or loss on an investment with a known historical return rate is referred to as the expected return (RoR). Potential outcomes are multiplied and then totaled to get the probability of each occurring.
Put another way; it’s the profit or loss an investor can expect from their investment, expressed as a percentage. To get at an expected return, one must multiply the possible possibilities by the probability that they will come to pass and then sum the resulting numbers.
There is no said promise that your investment will provide the expected results. The weighted average of the expected returns of each portfolio investment is the portfolio’s expected return.
Understanding the Return-on-Investment Return on Investment (ROI)
The Black-Scholes option pricing model and the modern portfolio theory (MPT) both use expected return calculations as a foundational part of their respective models of businesses and financial theories. If an investment has a 50% probability of gaining 20% and a 50% risk of losing 10%, the expected return is 5% = (50% x 20% + 50% x -10% = 5%).
As a way of determining an investment’s average net return, the anticipated return is utilized. Based on a variety of possible outcomes, an investment’s “expected value” (EV) is computed using the following formula:
If I represent each previous return and probability, the expected return is calculated as follows: Expected Return = (Return x probability).
There are no guarantees about future returns because they are mainly based on historical data, but they often set realistic expectations. A long-term weighted average of historical returns can calculate the expected return value.
As the investment is subject to systematic and unsystematic risk, the 5% predicted return in the above example might never be realized. Unsystematic risk pertains to a single company or industry, whereas systemic risk threatens an entire market.
Harvard University’s Investing Methodology
Private real estate accounts for 13% of the company’s total assets and has played a significant role in its growth. In fact, because of its low volatility and excellent returns, real estate has long been a preferred asset class for many organizations and endowment funds. The asset class is a mix between stocks and bonds, giving both high-yielding cash flow and the possibility for long-term capital gains.
Endowments and institutions aren’t the only ones that can use Swensen’s formula. Additionally, individuals can increase the performance of their portfolios by increasing their exposure to private real estate.
Learn about Yale’s endowment investment strategy.
Our fund makes it possible for ordinary investors to take advantage of the advantages of this asset class. They are set up so investors can utilize our team’s expertise while spreading their money over many transactions. Over a five- to seven-year holding period, we aim to double our investments. We’ve already surpassed our return targets regarding equity multiples and internal rate of return (IRR) in our first two funds.
Short-Term Funds are Essential – How One Fund Does It.
Investing in short-term funds, which have a five- to seven-year life span, can result in better returns for our clients. That’s because we only keep assets until we’ve gotten the most money out of them. With this, our partners get better value for their money because we can reinvest twice as much capital as other fund managers in the same length of time. Private equity real estate investing, like any other kind of private equity investing, relies on consistently investing capital in assets with high expected returns to be profitable over the long run.
By investing with other investors, we want our $10 million investment in Fund III to be worth $100 million or more in 15 years or less. We feel that the best approach to accomplish this is to not hold on to assets for longer than necessary.
Investing in multiple mutual funds increases one’s net worth. To be a wise investor, you must ensure that your money always works for you. In private equity real estate, the easiest method is to commit to future funding. You can allocate the money you earn from one fund to invest in another by stacking multiple funds on top of each other. Returns can be sabotaged by money that is sitting in a bank account.
This has been rewarded for our partners who have done precisely this. Five years after the initial investment in Fund I has been fully recouped, investors will get more than twice their original investment in Fund I. A $250,000 investment will yield a total return of $550,000 to the investor (which includes their original investment).
Fund I investors committed to Fund II at a 92% rate and almost all of them increased their investment by at least doubling or tripling. Once again, investors are on course to see a more than six-fold increase in their invested stock.
Fund I’s $550,000 yield was rolled into Fund II, which now has an account value of $798,000 due to this strategy. In less than five years, this investment has more than tripled in value from its original $250,000 investment.
To make matters even better, we expect $798,000 to more than quadruple in the following three years to more than $1 million, as we realize all of Fund II’s assets entirely.
Investing $250k in fund-1 and then rolling it over to fund-2 resulted in a 10X return on investment in 12 years.
Let us now go to the next stage. Fund II has been fully utilized, and Fund III has reached its goal of $150 million in funding. For Fund III, the goal is the same as for Funds I and II: to invest in high-quality, underperforming assets to double our capital over five to seven years.
If we meet our goals with Fund III, the $1.1 million investment will be worth $2.2 million in around five years. Over less than a decade, an initial investment of $250,000 will have more than doubled its value. When money is continually working for you, it can multiply.
A future market situation will yield lower returns than we’ve experienced in recent years. That doesn’t mean private equity real estate investors should give up on the sector. The long-term forecast for this asset class is highly optimistic, and a well-executed asset allocation plan will consistently outperform the market’s ups and downs.
It’s better to set a fixed percentage for private equity real estate investments and stick with it across market cycles. The short-term returns on investments aren’t always positive, but the long-term gains are. High-level managers returned to investors somewhat more than 100% of invested cash even during the terrible recession of 2008.
For their size and era, Preqin, the primary data source for real estate investing, placed Fund I and II in the top 10 percent of their performance rankings. Regarding the first two funds, we outperformed the competition because of our team, our strategy, the quality of our sourcing capabilities, and our sound risk management practices.
An investor’s portfolio would be incomplete without some form of alternative investing. Investing in high-yielding asset classes and identifying the best asset managers in that market are the keys to capitalizing on these opportunities. A demonstrated track record and significant investment in their assets are required. Any manager worth their salt will find a method to profit in any market. Identify and adhere to your portfolio goal allocations in all market conditions. The best outcomes can be achieved if you stick to a plan.
Every year, the stock market doesn’t rise at the same rate. Make sure you’re always visible to take advantage of lucrative opportunities.
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.