How to calculate profitability?
One of the most common mistakes made by investors is the calculation of profitability. Should taxes and fees be taken into account? Should fixed income investments be discounted from inflation?
There are several issues that can easily lead to the theoretical return of an apparently profitable application to negative territory. This is especially true in countries like Brazil, where exchange rates and interest rates vary sharply.
We will explore the concept of profitability and liquidity in investments, taking the opportunity to analyze its impact on the world of cryptocurrencies. Follow us!
What is profitability?
Profitability is the return on an investment, regardless of whether it is fixed or variable income. Although not every asset necessarily has a cash flow, for example, gold or currencies such as Euro and Dollar, the variation between the amount currently available for redemption and the amount applied is the measure of profitability.
Gross profitability does not take into account any taxes and fees, while net profit deducts any expense associated with the investment. Another important return classification is in terms of nominal or real value:
Nominal value: does not discount inflation in the period;
Real value: return discount to inflation accumulated during the period.
For this reason, it is so important to understand whether profitability is gross / net and nominal / real. Without this classification it is impossible to compare investments.
What is liquidity?
Liquidity is the easiness to dispose of an asset, without loss of value. High-end works of art and real estate are extremely illiquid, meaning they take a long time to find a buyer. In the opposite direction, we have, for example, shares of the company Amazon or barrels of oil. Both are extremely liquid assets, traded around the clock, worldwide.
Fiduciary currencies - Reais, Dollars, Euros, and the like - are considered the most liquid instruments in existence. When it comes to investments, the standard measure is the number of days required to make a redemption without loss of income.
The relationship between risk and return
Although this model is a simplification, it serves to remind us that there is no investment with a high risk-free return. A contract notary contract with assets under guarantee appears to be low risk at first. However, the company's solvency indicators must be analyzed, in addition to the probability of these assets being blocked in the event of a dispute.
The way that professionals find to measure the risk of an investment is through volatility . Assets with large daily fluctuation in prices are more volatile, so they can be interpreted as more risky.
Liquidity affecting profitability
Even the conservative investor, who opted only for fixed income and real estate, may be surprised by negative returns when we consider the issue of liquidity. Redemption requests before grace or sales in a short period of time can result in large losses, even in investments classified as low risk.
It must be considered not only the grace period, that is, the period in which the investor is without access to the amount, as well as the redemption and settlement periods.
Multimarket and fixed income funds may require intervals of 90 days or more until the amount is deposited in the bank account. For this reason, attention should be paid to liquidity when analyzing the risk and return of each application.
There is no risk-free, high-return, liquid investment
The best way to understand this concept is to think of a tripod. When looking for a return, you are necessarily moving away from low risk or immediate liquidity. There is no way to obtain the three conditions simultaneously.
If they are selling you an investment with low risk, an excellent return opportunity and a promise of almost immediate liquidity, rest assured that there is something wrong. Do not put your money on any product or service without due diligence, that is, assessment of the built-in uncertainties.
The importance of diversification
Diversifying means dividing investments into different classes, in order to prevent the same factor from significantly affecting the entire investment portfolio. A simple rule of thumb is to segment half of the equity into low-risk assets, for example, real estate and fixed income securities, leaving the risk to the other half.
This strategy seeks to increase the resilience capacity to shocks and reduce losses due to unexpected factors. At the same time, avoiding exposure to risk is not desired for most people, as even Treasury Bills can be momentarily lacking liquidity.
Benefits of Crypto in Diversification
One of its main characteristics of cryptocurrencies and alternative investments is the fact that they are not necessarily correlated with the traditional market, such as fixed income or shares. The stock market tends to move relatively evenly, especially during periods of crisis and recession.
Alternative assets offer a unique opportunity for investors to diversify their portfolio and improve their risk-return. Crypto assets have a high potential for profitability, no doubt, but they are riskier than multimarket funds. For this reason, cryptocurrencies must enter the investor portfolio in proportion to the risk appetite of each.
It is indisputable that an allocation in cryptocurrencies increases the return on an investment portfolio and reduces the total risk, due to its low correlation. The important thing is to start from scratch, start with a small allocation in cryptocurrencies, somewhere between 1% or 5% of the equity, and only increase as you are comfortable with the dynamics of profitability.
