We talked about inflation, that “thing” that eats up the value of your money, and how can it really affect your financial capability. That is why we invest in order to combat it. There are so many ways to fight it and eventually outrun it so that you can relax and sit back.
One important word you have to understand is the word RETURN.
RETURN is what you get from your investment over a period of time. Knowing this, how can we use this to fight inflation?
In my beloved girlfriend’s blog moneylifeblood she mentioned a concept about return in our small business back in her home in San Mateo. We opened a “sari-sari” store and some of her points really explained the usefulness of knowing your return.
Return can be computed by expressing it in terms of a percentage. With that we can now compare it with the rate of inflation thereby we have a barometer to check if we are really making it, beating inflation, or just making it eat more the value of our money. As my Krissy mentioned, selling cheap seems like losing because we only get a small return but if we get that small return many times or faster it would be better than waiting for the return on a longer time period. Just like Chinese merchants they may be selling at cheap or near cost prices but the secret to it is to earn that amount faster thereby increasing the rate of return.
So for us in the stock trade it would be foolish to keep putting all money in a long term but we should allocate our funds to both long term and short term investments to fight inflation. We can continue accumulating shares of blue chips in small portions while earning more buying stocks for short term investments and re-investing the returns either to accumulate more of blue chips or expand our portfolio of stocks that gives good returns at a shorter period of time.
The faster you get your return on your investment the earlier you could sit back and enjoy your blessings with your loved ones and to all the people you really care for. So invest in different investment vehicles that give returns faster to fight inflation; know your rate of return.
Now how do you compute your rate of return? Simply divide your net profit by the cost of your investment.
Rate of Return = Profit/Cost
or to extend the equation
Rate of Return = (Earnings-Cost)/Cost
This will be your starting point.
If your Rate of Return is negative or it is not even above the inflation rate you could do three things to improve it.
- Increase your Earnings and maintain your cost
- Decrease your cost and maintain your earnings
- Or do both: Increase earnings and Decrease Cost
It may be impossible at the beginning but with all the free resources out there we can fight inflation.
Know your Rate of Return.