Observe and analyze the pattern of profitability over the last 6 months. It is clear that stocks, commodities and other financial instruments cannot guarantee continuous capital growth. It can vary and be, for example, so: 17%, 5%, -3%, 37%, 51% and 7%. With the exception of bonds, deposits and instruments with the fixed profitability.
To describe the profitability index is used the average net profit, which is calculated by several methods, sometimes, not always accurately. Simple or standard method for the determination of the average profit assumes the use of the calculation of the arithmetic mean. For rates of return in the above example it follows that the arithmetic mean will be:(17 + 5 - 3 + 37 + 51 + 7)/6 = 19. I.e., the average monthly yield of 19%. Make sure that is it really. Suppose you have invested 100 p. Then in accordance with the above monthly return you will receive an amount equal to approximately 284 R. in Other words, with an average yield of 19% within 6 months, you received at the end of the period 284 R if you invested 100 p
Compare the results of your calculations with a real monthly profit. After a simple calculation, you will find that the real capital at the end of the period amounted to 263,77 R, whereas, according to the arithmetic method of calculating the average yield, it is equal to 284 R, i.e., approximately 7.1% more. So it is easy to verify that the standard method does not reflect reality and gives exaggerated figures from your investment activities.
To assess the average profit for a particular period, use the formula of geometric average or proportional values, not average. For the considered example, the average monthly income in per cent, correct calculation will be equal to: (1,17*1,05*0,97*1,37*1,51*1,07)^(1/6) = 15,8263%, not 19%, which is lower than the standard calculation. Checking arithmetical calculations the accuracy of this method, you make sure that you got real value 263,77 R.
Use in practice the obtained experience. Ask about the method of calculating average profitability, for example, of its own assets. Keep in mind that stakeholders (from PIF to personal brokers) can take advantage of the situation and provide you with incorrect information, which is especially important when working with an impressive amount of money.
Correctly assess your average profit for a certain period and be sure to specify the method of determining this figure, not allowing themselves to be deceived.