Saturday, October 25, 2008

Understanding The Real Rate of Return!


There is an indicator more than any other, determines the health of an economy, and it is the right return. In addition, the simplest of all indicators to understand because it determines the security of assets. Next time you hear talking head discussing the nuances of the markets, filter what they say, through your own understanding of the real rate of return.

The Real returns for a series, which is crucial for the safety of principal. It is calculated by taking the current bond yields and pull the inflation expectations from it. The result is the real return on giaranteed money from the government.

Interest rates are rising, as we have been waiting and this pressure has put an enormous pressure on the stock exchange. The essential simplicity at work here is very, very basic. If interest rates on bonds offer 5.14% and inflation is forecast at 5%. The difference is the real rate of return (in this case we are talking about 14%). Real return is sparking large rallies and purchaser on Wall Street.

The reason for this is that the bond is the largest financial market in the world. There are literally trillions of dollars invested in debt assets. These investors are primarily interested in the safety of their principal and take minimal risk as possible. They have historically been enthusiastic about the fixed-income securities, which would be 2% - 5% annually. During the 1970s this indicator was negative for a while, indicating inflation was rising faster than interest rate and bond markets investor actually had a significant negative returns. During this period, there was much "screaming and gnashing of teeth."

It has always been my view that Federal Reserve Chairman Alan Greenspan's primary task is to keep REAL returns as high as possible. He has been a great success in this way. If you read back over a history of financial markets you would be wise to see the events through this indicator. The economic climate is remarkably different, and people's opinions change dramatically when the real yield on the most secure investment is threatened.

A thorough understanding of this simplicity is necessary for success in any form of investment, as it is the basic building blocks, like any other analysis is based on. Although it is always difficult to predict what will happen in the future, is a factor, you can count on is that when the real interest rate is falling there is much sweat on Brows money managers, which monitors trillions of dollars left for them.

At this point Keep your eyes on this indicator, and make your own forecast for inflation. You will realize that your-ANALYZE can be better than the Big Boys.

Let us be cautious others are!


Dowjonesfully,
-Harald Anderson

http://www.eOptionsTrader.com.

Harald Anderson is the founder and Chief Analyst of eOptionsTrader.com a leading online resource of Options Trading Information. He writes regularly for financial publications on Risk Management and Trading Strategies. His goal in life is to become the kind of person that his dog already thinks he is. http://www.eOptionsTrader.com.

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