Wednesday, May 31, 2006

Yield is Real


The concept of yield, (an expression of the return the annual income of an asset provides measured as a percentage of it's current market value), is a fundamental investment tool, used to analyse individual investments and to compare alternative investment opportunities.

To explain further. An investment yielding 20% will pay €20 per annum for every €100 invested, whereas with a 5% investment the return will only be €5 for every €100 invested.
Obviously the investment returning 20% is more attractive than that returning only 5%. But hold your horses. Yields tell us more than what return an investment will make.

A high yielding investment reflects higher risk. In order to attract money which would otherwise go to safer investments poorer quality investments must offer some type of compensation. Usually a higher yield. Risk is measured in horse racing in a similar way, the betting market odds, a dead cert offers poor returns, a rank outsider offers the possibility of fantastic returns.

In the Irish residential investment market at present yields are very low, somewhere between 2-3% per annum net on capital employed. This would seem to suggest that the risk involved is very low, but this is not the case. The risk is probably higher now than at any time in the past few decades.

2 comments:

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