Return

What's the implication of 4.5% and 8% ? Let me give you a slightly convoluted explanation.

Many of you may have encountered those advertisements of our Monetary Authority: the return of an investment is proportional to its risk.

The point is, as Benjamin Graham pointed out (some 70 years ago, in Security Analysis), the return of any risk-free investment is expected to be roughly equal to the nominal inflation rate, which is around 4.5%. (Graham himself used the US treasury bonds as the example of a risk-free investment, which we may not agree nowadays. That's another story.)

How about a business with an average risk (alas, so-called market return rate) ? According to Graham, the expected return is 8% in the long run.

The inevitable conclusion is, therefore, to meet the requirement of the real-life inflation, one must go for business with an average risk and should never do ordinary saving or any so-called risk-free gadgets (including government bonds).

PS. JW, TW, and other friends who are experienced investors would recognize I have done away with jargon such as Beta and Market Return Rate.

By definition, beta is one for an ordinary business. The above calculation indicates that the deviation is 3.5% (i.e. 8% minus 4.5%). For an investment with very high risk, beta equals 3, and the expected return is 4.5% plus 3 time 3.5%, which makes 15%. An investment with expected return above this figure is unrealistic.

Interested beginners are encouraged to read The Intelligent Investor by Benjamin Graham or The 10-Day MBA by Steven Silbiger.