Entrepreneurs

Four Best Methods to Evaluate Your Long-term Investment

Generally, long-term investments are defined as financial securities that can be held for any period between one year and thirty years. The exact number of years is relative to the type of investment and the investor’s personal goals.

Long-term investments require a major amount of self-discipline and restraint, a solid knowledge of risk assessment strategies, and the discretion to make a terminating decision if things go south. These days, most people prefer to have investment firms run point for their funds and make the professional decisions on your behalf.

Some of the most popular long-term investment options are:

          Real estate

          Stocks

          Bonds

          Equity funds

          Mutual funds

          Minerals (gold, etc)

          Provident funds

          NFTs

          Cryptocurrency (high-risk)

Long-term investments are unlike their short-term counterparts in many ways, but the major differences are mindset and patience – a lot of it. Long-term investors aim for exponentially higher returns accumulating over longer periods. As a low-risk option, if the value of a 100-acre land spread appreciates 5% in one year, a long-term investor can wait 20 years for an exponential 150-200% profit. The risk becomes more substantial in options like stocks and equity funds, where a 1000% increase in a company’s value over ten years could plummet to a negative value in one week – strokes of unpredictable ill luck.

Evaluations are essentially for long-term investments, before and during the periods of commitment. Evaluation is basically a personal assessment of the investment plan relative to the investor’s finances and timeline goals, to obtain a “reasonably reliable” insight of their expected or current growth trajectory.

Below are four solid techniques for evaluating your long-term investment plans:

Payback Period Method

Payback Period refers to the amount of time it would take for an investor to recover their initial capital. It’s often interchanged with the breakeven point because at this period, cash inflow and cash outflow become equal.

Payback Period Method is widely used to present investment returns by a measure of years. It allows you to make the most informed decision about capital recovery, based on how quickly or slowly your initial investment will be accumulated, and from then onward, profits can be enjoyed.

Shorter payback periods have an advantage because they force you to stay more time in cash during a defined timeline, says David Rojas, a Colombian entrepreneur in Canada and the founder of Blue Castle Ventures, a leading strategy developer in the world’s financial markets delivering market-leading investment returns to capital partners. “Cash  is also a position because it protects you from the swings of the market, especially the negative ones and allows you to have available capital to deploy when good opportunities appear. This reduces the risk in short-term investments and allows you to react or tweak your strategy if something does not go as planned.”

Rojas, whose business focuses on running investments for everyday people and providing realistic returns, defines an easy payback period formula as shown below:

Initial capital /Average Annual Cashflow

“If you invested $100,000 in a plot of land and you lease to tenants for $1,200 a month including taxes, the payback period for your investment would be – $100,000/ 1,200 x 12 months = Approximately 7 years.”

Accounting Rate of Return

Where Payback Period gives information regarding the timeline, the Accounting Rate of Return shows you the yearly percentage of profits to be expected on an investment, relative to the initial capital.

Investors love percentages.

They offer a straight-up estimation of what can be expected in due time from one plan compared to other options. A higher ARR makes for a better investment while a lower ARR means you’d have a longer payback period. However, be careful with high ARR investments – some are often too good to be true.

To calculate ARR, simply divide the average annual profit / initial investment.

Profitability Index

The profitability index is a tiny metric that measures the rewards on every single unit of currency invested. If you invested $10,000, the P.I. shows the benefits on every one dollar.

The profitability Index is extremely important in deciding whether an investment is “good” or “bad”. A P.I. below 1 is a bad project and will lead to an accumulated value with minimal or no profits. A P.I. equal to 1 is neutral and may be subject to potential change. A P.I. above 1 is a great project, go for it.

The formula for profitability index is:  Present Value of Future Cash Flows/ Initial Investment

Return on Investment

Most people just assume the ROI is merely the difference between the current value of the investment and the initial capital. Well, basically, but not exactly.

“ROI tells us how much your money has grown compared to what you invested and this is why it’s expressed as a percentage,” says Rojas, whose brand also develops strategies with Crypto-Certificates, Cryptocurrencies, NFT, Trader Training. “If, for example, you invested US$1,000 in stock at US$1 per share and you later sell at US$1.30 per share, you will have US$1,300 which means your investment grew by 30%.”

Calculating the ROI is done as follows:

(Current value of investment – Initial value of investment)/Initial value of investment

Conclusion

Long-term investments can either set you up for life with generational wealth or crash you down to your lowest. A lot of the current options we have today are disturbingly similar to gambling and betting on uncertainties. It’s always best to employ the services of a certified professional for the best recommendations, based on your personal goals and funding limits. You can never be too careful.

 

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