As a student or as a parent of a student, you may wonder sometimes how math can apply to real-life situations. Investing is one of those math-related things that people use all the time, so learning about how they work is important. To get you started in teaching your children about investments or in learning yourself how they work, here are some general features of four major investment types and how to measure their returns.
A mutual fund is money pooled together by a group of investors to invest in various things—usually things like stocks and bonds. The investors usually have a specific goal in mind when choosing their investments. To measure the future value of mutual funds, you need a few things. You need to know a starting amount or initial investment, how many years you expect to invest in the funds, additional contributions you will make, and an estimate of the annual rate of return as a percentage.
Now here comes the math part. To calculate the return, you can start with the per-unit market value or net asset value of the fund. The formula subtracts debits (expenses, debts, and liability) from assets and divides this figure by the number of units you have. Take this figure and multiply additional investment installments, the number of periods, and rate of return as a percentage. This is very rough but pretty informative.
There are lots of ways you can invest in real estate. According to Fundrise, some common ways to invest in real estate include being a landlord, investing in a private equity fund (investing in real estate with other people), and flipping houses.
To figure out how much a real estate investment will be worth, you’ll need something called a projected growth rate. You can find this in the U.S. House Price Index. Add one plus the annual growth rate. Take this number to the nth power where n = number of years. This is your future growth. Future growth multiplied by current value will give you future expected value. Do Hard Money recommends finding at least 3 or 4 comparable sold properties in the neighborhood to give you a baseline estimate. Since rental properties generate income, they can substantially raise returns on investments and their future value.
Bonds are basically when you loan the government money to do things take care of federal debts and build bridges. It’s almost like you are a bank. Bonds are often considered safe investments because they have a steady return, and so are a reliable source of income. They are different from stocks and mutual funds in that their coupon or interest rates are fixed as are their face values.
The investment lies in a bond’s valuation or purchase price, which may be higher or lower than its face value. This is the sum of the expected cash flow and the value of the face value of the bond. Expected cash flow involves coupon rate, yield to maturity, and the number of periods, while face value’s value incorporates the discount rate and time to maturity. Interest rates paid on bonds are usually a percentage of the bond’s face value.
Although investing in precious metals can be risky, precious metals can add stability to a portfolio by decreasing inflation. Their future expected returns are based on factors that go beyond supply and demand. Increasing U.S. interest rates can decrease gold and silver prices which also fluctuate due to economic changes and inflation. Platinum’s increases, on the other hand, is based on rising automobile catalyst demands. Silver sees more influence from industrial sectors. Gold holds value relatively well with high volatility indices in the stock and commodities markets.
To find the current returns, add interest to the closing price; divide by the initial investment and subtract one. An estimate of future expected value depends on projected interest rates and whether the market value changes. Overvalued markets can benefit precious metal prices.
Regardless of what you decide to invest in, it’s important to understand how to use math to measure each type’s returns so you can gain the most benefit from it. Just make sure that when investing in any of these areas, you consider projected earning rates, amount of time invested, and principals. With this information, you can easily manage your portfolio and gain profitable returns, even in an unpredictable environment.