RATE OF RETURN [RoR]: Investments 2022?

Posted on April 14, 2022 by Dr. David Edward Marcinko MBA MEd CMP™

By Staff Reporters

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DEFINITION: A rate of return (RoR) is the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost. When calculating the rate of return, you are determining the percentage change from the beginning of the period until the end.

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And so, according to Greg McBride CFA, before you invest your money, you’re likely wondering how much you’re going to earn. This is known as the rate of return. The rate of return is expressed as a percentage of the total amount you invested. If you invest $1,000 and get back your original investment plus an additional $100 in interest, you’ve earned a 10 percent return.

CITE: https://www.r2library.com/Resource/Title/082610254

However, numbers don’t always tell the full story. You’ll also need to think about how long you plan to keep the money invested, how your investment options have performed historically and how inflation will impact your bottom line.

Key return on investment statistics

When you’re trying to get the best return on your investment, you’ll likely start combing through loads of data. A good place to start is looking at the past decade of returns on some of the most common investments:

  • Average annual return on stocks: 16.63%
  • Average annual return on international stocks: 7.39%
  • Average annual return on bonds: 3.05%
  • Average annual return on gold: -0.21%
  • Average annual return on real estate: 11.72%
  • Average annual return on CDs: 0.40%

CD rate data is from internal Bankrate averages.

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ECONOMICS: https://www.msn.com/en-us/money/realestate/from-real-estate-to-inflation-heres-what-to-expect-from-the-economy-in-2022/ar-AASbBHN?li=BBnb7Kz

MARKETS: https://www.msn.com/en-us/money/markets/stock-market-outlook-were-going-to-get-an-explosion-to-the-upside-in-january-strategist-says/vi-AASbBih

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COMMENTS APPRECIATED.

How have you done so far in 2022?

THANK YOU

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Thank You

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Understanding Your Real Rate of Return [RROR]

Posted on February 23, 2016 by Dr. David Edward Marcinko MBA MEd CMP™

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Some Modern ROR versus RORR Musings

Rick Kahler MS CFPBy Rick Kahler MS CFP®

http://www.KahlerFinancial.com

Is there anything more important than the overall rate of return you earn on your investment portfolio?

Yes, there is. It’s the real rate of return.

Past Half Decade

Over the past five years, even diversified portfolios have earned relatively low returns. Many investors are fearful that this has significantly reduced the income they can expect to receive upon retirement.

To see whether that fear is justified, let’s look at some numbers. Based on a model portfolio I follow that holds nine different asset classes, the average return for the past three years (after all fees and expenses) was 2.45%. The five-year return was a little better at 2.67%. However, the seven-year return was 5.62%.

If an expected long-term (10 years or more) overall return on the same portfolio was 5.00%, at first glance it appears the portfolio slightly exceeded its expectation for seven years, but fell considerably short the last three and five years.

Now – Take a Second Glance

But, if there is a first glance, you know there is a second glance coming. And that second glance highlights a seemingly obscure fact that changes the picture considerably. In every future return expectation, there is also another estimate that rarely is mentioned, but which is as important as the rate of return. This is the rate of inflation.

While the long-term expected overall return was 5.00%, the long-term expected rate of inflation was 3.00%. That means there was an expectation the investments would earn 2.00% above the rate of inflation.

This is known as the real rate of return (RROR) and it’s far more important than the overall rate of return.

For example, if the projected inflation rate was 4%, the expected real rate of return would have been 1%. At a projected inflation rate of 6%, the real rate of return would have actually been negative.

Most financial planners base their projections of a client’s retirement income on the real rate of return. A real rate of return of 2% is very common.

The Real Rate of Return

Taking into account the real rate of return, what has actually happened over the past three, five, and seven years? Overall expected returns have definitely been lower over the past three and five years. So has the rate of inflation. While the estimated inflation rate was 3.00%, the actual inflation rate was significantly lower, at 0.78% for the past three years and 1.03% for the past five. Subtracting these numbers from the overall rate of return (2.45% for three years and 2.67 for five years) gives us the real rates of return: 1.68% and 1.64% for the last three and five years. Compared with the estimated real return of 2.00%, this is slightly lower but still close to hitting the target.

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stock market

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Looking at the seven-year real rate of return, things go from “ok” to “phenomenal.” While the overall rate of return of 5.62% was higher than the expected return of 5.00%, the inflation rate was 1.03% instead of the expected 3.00%. This resulted in a real rate of return of 4.59%, more than double the expected real rate of return.

Bottom Line

The bottom line is that those investors who have been in the market for seven years will have more to spend in retirement than previously projected. In investment circles, this is called a home run.

For physician investors discouraged by recent overall return numbers, a second look might give you cause to cheer up. If you’ve invested in a diversified portfolio, rebalanced, and stayed the course during market crashes, things may be better than they seem.

Assessment

Thanks to one of the lowest inflation rates in modern history, you could be further ahead than you thought.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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Determining the Required Rate of Investment Return

Posted on July 12, 2010 by Dr. David Edward Marcinko MBA MEd CMP™

Financial Fundamentals of Medical Practice Sales

Dr. David Edward Marcinko; MBA, CMP™

SPONSOR: www.CertifiedMedicalPlanner.org

A physician investor’s required rate of return [RoR], for the sale of a medical practice, takes into account that monies received sooner have a greater value than those received later. And, the greater the risk in receiving future cash flows the lower their current value. Moreover, one must always keep in mind returns that can be earned on alternative investments.  A required rate of return takes all these factors into account.

The Process

The process of selecting an appropriate required rate of return begins with an assumption that all investors will require, at a minimum, the risk-less rate of return offered by government securities. Government securities with a maturity similar to that of the duration of the investment in a private [practice] company are selected, and normally; and a duration of ten to twenty years is used. Because of the minimal default risk associated with government securities, the rate is referred to as the risk free rate. THINK: Freddie Mac and Fannie Mae.

Physician Investors

Investors typically require returns greater than the risk free rate. The additional return (in excess of the risk free rate) is called the risk premium.  Risk premiums are generally calculated through an analysis of historically realized rates of return segmented by varying levels of risk, and medical practice specialty, etc. This analysis illustrates that higher historical rates of return occur in situations of higher risk. For example, securities issued by the U.S. government have lower rates of return than securities issued by large corporations. Returns on the equity of large corporations are greater than those of debt securities issued by the same firms. Thus, historical rates of return are generally used as a proxy for future required rates of return; despite the market implosion of 2008-10 and can be adjusted for 2024.

Healthcare Business Valuation

When valuing a medical practice, clinic or healthcare business entity, one must compare the risk of the expected cash flows of the entity being valued to the risk of the cash flows of like [private] publicly traded securities and to determine an appropriate required rate of return based on that assessment.

Cash Flows

It is generally assumed that the expected cash flows from an investment in a closely held healthcare business are at least as risky as those of large publicly traded firms. The combination of the large firm equity risk premium and the risk-less rate of return provide an indication of the required rate of return for the buyer or seller. Beyond that, additional risk premiums related to entity size, proportion of debt and health industry conditions exist; and many other possible company specific risk factors may be appropriate.

Assessment

When valuing a small business like a medical practice, we appraisers generally employ required rates of return 10 percent to 30 percent beyond the current long-term risk free rate for the risky and fragmented healthcare industrial complex.

In summary, the required rate of return used to value a closely held medical business represents the return a physician investor demands to invest funds now with the expectation of the uncertain cash flows associated with ownership of a private company.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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