What are returns? How to measure them?

In Switzerland, most households have a portion of their assets invested in at least one fortune that yields returns. Not that long ago, it was very common to see ads for savings accounts with an annual interest rate. 

But, what does making a return actually mean? And how can you measure it? 

As usual, we will try to make things as simple as possible. 

If I put 100 CHF on an invested product and that, at the end of the year, I end up with 105 CHF on my account, I will have made 5 CHF. 

To calculate the return made that year, I have to divide 105/100 = 5%. 

Now, let’s use a small example. 

Zoé makes 90,600 CHF per year, while I make 72,000 CHF per year. 

In order to compare the savings we could each put aside, we were curious to find out how long it would take to accumulate a nice little capital.

Zoé wanted to make a bet: she told me “I bet you that, at equal performance, if you start putting aside 250 CHF per month from when you turn 25 and that I start to put double aside (500 CHF) per month starting from my 35th birthday, my capital will be bigger than yours by the time we retire!” She’s my wife… of course I took the bet, especially since I knew she would win…! 

Let’s have a closer look at this. Say our respective investments make us 3% in profit each. (Which is rather low!). 

Two charts explain that starting an investment at age 25 in mutual funds rather than at age 35 the capital withdrawn at age 65 will be significantly different because of the return.

It turns out that by investing 250 CHF per month with a 3% yearly profit, by the end of my 65th year of life, I will have a total capital of 243,070 CHf.  

How? I invested 3,000 CHF per year, which adds up to 123,000 CHF by the end of my 65th year of life. If I add the interests, I got over the course of these 41 years, which amount to 120,070 CHF, it gives me 243,070 CHF. Not bad, right? 

Now, let’s look at the image on the right real quick: does slope look steeper or is it just me? 

Yes, it is indeed steeper and Zoé was right to take a bet. Because as you can see, by starting her savings 10 years after me but investing double the amount, she will have a total capital of 309,017 CHF by the end of her 65th year of life! Are you doubting these numbers? Have a look at the graphs that compare everything directly side by side. (The columns are exactly the same as in the two previous graphs but I made Zoé’s investment lighter to improve understanding).

Histogram synthesizing the fact that an investment from 25 years old in investment funds rather than at 35 years old the capital withdrawn at 65 years old will be considerably different in terms of return.

So, does this make you want to invest now

I must say, given that a 3% return is actually quite low in comparison with existing offers, I let it to you to imagine the range of options you have… 

Do you have an opinion? A suggestion ?

Your email address will not be published. Required fields are marked *