How to assess your investment strategy’s success
Learn the key factors you’ll need to evaluate the profitability of your trading strategies
Assessing investment success involves considering factors such as ROI (return on investment) portfolio diversification, risk evaluation and performance metrics like IRR (internal rate of return) and money multiples
A return on investment (ROI) is a measure of the profit or loss generated by an investment over a specific period
An internal rate of return (IRR) is a measure used to evaluate the potential profitability of an investment, but ignores risk
Money multiple measures returns in private equity and venture capital funds
A multi-asset portfolio is a popular strategy for distributing risk and enhancing potential returns
Evaluating the success of any investment strategy depends on the individual's investment goals, risk tolerance, and time horizon. However, there are indicative factors that can be used and some general guidelines that can be followed to assess an investment strategy’s effectiveness, allowing investors to make more informed decisions on future projects.
Understanding ROIs and multi-asset portfolios
A return on investment (ROI) is a measure of the profit or loss generated by an investment over a specific period. It is calculated by dividing the gain or loss of an investment by its initial cost. ROI can be expressed as a percentage and is commonly used to evaluate the performance of an investment.
A multi-asset portfolio is a portfolio that contains a mix of asset classes, such as stocks, bonds, commodities, and real estate. The goal of a multi-asset portfolio is to diversify risk and enhance returns by investing in different asset classes that behave differently and have low correlation with each other.
The return of a multi-asset portfolio is determined by the returns of each asset class in the portfolio and their respective weightings. The weights of each asset class in the portfolio are determined by the investor's risk tolerance, investment goals, and time horizon. The returns of each asset class are influenced by various factors, such as economic conditions, company performance, interest rates, and geopolitical events.
The performance of a multi-asset portfolio can be evaluated using various measures of returns, such as total return, annualized return, and risk-adjusted return. Total return measures the overall return generated by the portfolio over a specific period, including capital gains and dividends. Annualized return measures the average annual return of the portfolio over a specific period, while risk-adjusted return measures the portfolio's return in relation to the level of risk taken.
Understanding IRR vs Risk
An IRR, or internal rate of return, is a measure used to evaluate the potential profitability of an investment. It is the discount rate that makes the net present value (NPV) of an investment equal to zero. In other words, it is the rate at which the investment's cash inflows equates to its cash outflows. IRR is often used in capital budgeting to compare the profitability of different investment projects.
While IRR can be a useful tool for evaluating the potential profitability of an investment, it does not consider the level of risk associated with the investment. Therefore, investors should consider the risk associated with an investment in addition to its IRR.
Understanding the money multiple ratio
‘Money multiple’ is a financial term used to measure the return on investment in a private equity or venture capital fund. It is a ratio that compares the total distributions received from the fund to the total capital invested in the fund.
The money multiple is a measure of the return on investment in a private equity or venture capital fund, calculated by dividing the total distributions received from the fund by the total capital invested in the fund. While it is a useful metric for evaluating the performance of a fund, it should be used in conjunction with other performance metrics and may not provide an accurate measure until all investments have been realized.