Profitability is the company's profit divided by the company's market value. Generally speaking, the higher the profitability, the lower the company's valuation, and the easier it is to be underestimated.
How do we use the rate of return to invest in index funds? Historical statistics show that if you start investing in index funds when the rate of return is relatively high, the long-term return will be quite good. On the contrary, if you invest in index funds when the rate of return is low, the income is average. Based on this, we can formulate a fixed investment strategy suitable for index funds.
Here are two reference data. The yield is 10%. When the yield is greater than 10%, the fixed investment will be started. On the premise that the profit rate is significantly higher than the risk-free interest rate in the same period, the profit rate is above 10%, and the risk-free interest rate can refer to the yield of 10-year treasury bonds. When the rate of return is lower than 10%, the index fund loses its appeal and has no significance of fixed investment. The share that has been fixed investment can choose to continue to hold. When the rate of return is lower than the rate of return, the fixed investment should be suspended. The long-term average income of bond funds is nearby, and the standard of yield comes from here. If it is already below, it is better to invest in bonds directly. After all, bonds have a lower risk factor. Therefore, when the rate of return is lower than the standard, we can suspend the fixed investment and redeem the fund in batches.
Under normal circumstances, the change of profitability will not be too big, so don't worry too much about the need to adjust the fixed investment plan frequently because of the change of profitability.
What kind of effect can index funds produce by adopting the rate of return method?
This investment strategy was founded by Graham. After decades of market tests in various countries, it still stands. Can be said to be a very simple and effective strategy. In this way, the average rate of return can reach 15%.
Will there be acclimatization in this newly developed investment land in China? We take the SSE 50 index as a sample and conduct a back test according to the established data model. The results show that the average annual return rate of SSE 50 index funds can reach 29% by using the income-return method to guide the fixed investment. If it is just an ordinary fixed investment, the rate of return is about 12%. In other words, using the profit return method, the return rate of fixed investment can be more than doubled.