“I’m interested in investing and if possible, would like to know what the most profitable investment is generally."
- Question from Adolf in Papua New Guinea
Top answer provided by:
Robert Daniele
There are many different forms of investing. This could range from placing your money in a savings account with a bank to investing in shares, property, and many other forms in between. Defining profitability can vary from person to person.
Defining profitability can be different from person to person
What makes an investment profitable? Well, that can differ for each person. Imagine you're Person A. You don't have much income, so putting your money in a bank savings account that gives you a little extra each month might feel like a significant win. That's because it meets your needs and offers a reliable return. On the other hand, if Person A decides to invest in a property, they might see it as a financial burden since it could cost them each year to maintain. They might even view it as "unprofitable." However, in reality, over the long term, the capital growth from the property could potentially outperform what the bank interest would have provided and cover all the expenses they've paid along the way.
It's all about perspective and aligning with your financial goals. Picture presenting these scenarios to someone who requires steady income versus someone who doesn't need immediate funds. Their concept of profitability could be vastly different.
Trying to “pick the best performer”
Trying to "pick the best performer" is nearly impossible, akin to predicting the weather a year from now. Imagine you a trying to look at investing in a basket of various indexes from shares all the way to cash based investments. This infographic here displays how different asset classes have performed from 1994 through to 2023. Looking at it myself, I think it is a bit of a minefield and you can see one year’s best performer is the next year’s worst or somewhere in between. This chart to me highlights how hard it can be to always find the most “profitable” investment as no one knows what is going to happen next year to every different asset class and what the return would be.
Summary
So, where does that leave us? The first step is to define what "profitable" means to you. Consider your income needs versus your desire for your investments to grow over time. After that, it's about assessing the risks you're comfortable taking. Remember, risk and reward.
The next step would be to not try to “pick the best performer”, rather diversify your investments such that if one part of your portfolio has a bad year, there is hopefully other parts that aren’t correlated and might have a “good year”. This way hopefully over the long term you can extract the profit from investments by staying invested and being rewarded for taking some risks. As always there is a lot of ins and outs with investing and it is best to seek professionalised advice from someone who is licensed to give the advice.
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