How Much are your Investments Really Worth?

Investing is simple, right? You put money in, wait, take money out, and when you get more money at the end than you put in in the beginning, you did good. Then you do it all over again.

If you’re laughing right now, that’s a good sign. Investing is complex, challenging, and not always rewarding. In fact, it takes a great deal of knowledge about the process and all the factors that could impact your individual investment to even have the ability to judge what is worth investing in, at what time, and for how long, and when to divest yourself of it in order to actually come out ahead.

Excellent resources can help you gain an edge, and the more you know, the better your odds, so make access to information a priority. Seek out timely, accurate news, expert share tips and advice, and great learning resources related to the practice of investing and the specific type of investments you decide to focus on.

Relying on data and having a solid foundation in mathematics, the scientific method, strategic thinking, and the pertinent calculations can also help you make savvy, fact-based decisions. Human nature tends to respond to the stakes and the pressure of investing much like gambling or a recreational game, and managing your emotions to make better decisions can help improve your outcomes.

One area that often gets overlooked is risk adjusted return on investment. When you make your decision about what to invest in, you try to calculate a projection of how much you could earn on the investment based on how much you put in, when, and over what duration. If you’re an active investor, you redo your calculation when you sell your shares or divest of the fund to see how well your actual earnings match up to your projected earnings.

But if you don’t factor in the market risk, you’re missing an important element of your calculation. You can’t predict the future, but you can take steps to account for it. In simple terms, this means you can’t just look at the money you invested and the potential money you could get out to assess whether an investment is a good choice or not. You have to add in an actual cost for the degree of risk involved to get an accurate idea of its value.

High-risk investments also carry more potential for significant returns than low-risk ones, particularly in the short-term, so they can be tempting. Measuring your risk-adjusted return instead of the optimistic and inaccurate non-risk-adjusted return can help you make more clearheaded choices and resist the emotional pull and temptation to take a gamble. Some investment resources try to inform you about risk levels, but fail to do so in much detail, so making an accurate projection means you have to learn how to adjust for risk in your own calculations.

If you’re not measuring risk-adjusted returns, you don’t have a clear idea of how much your investments are really worth, and the wildcard of risk could be eating away at your profits without you knowing about it until it’s too late.