The Borg formula is a very famous formula in the investment of index funds. Through the Borg formula, we can make more professional investments and obtain more returns. But how does the Borg formula work, and how can the Borg formula method be used for investment? Let's learn together.
John Borg is the father of index fund, who invented the first index fund. He is the pioneer founder of the world's largest fund management company. As the founder of index funds, he has a unique in-depth research on index funds.
We all know that the profitability method is simple, effective and reliable. However, the disadvantage is that there are few suitable varieties, for example, the varieties with high profit growth and large profit change are not suitable. So John Borg improved the formula and put forward the "index fund income formula". Borg formula analyzed several important factors that affect index funds. We can use the Borg formula to invest in varieties with rapid growth in profits or varieties with changing profit cycles. This formula is applicable to most index funds.
Factors that determine the return of index funds: John Borg analyzed the factors that determine the return of index funds in the long-term investment process, and he found three factors that determine the long-term investment return of the stock market:
1. Dividend yield at the time of initial investment
2. Change in P/E ratio during the investment period
3. Profit growth rate during the investment period
Why are these three factors? Let's first understand what the points of the index represent. The points of the index represent the average weighted value of the stock price, reflecting an average stock price. Our investment in index funds naturally hopes that the index points will rise. Then we need to know why the points are affected.
我们都知道：市盈率=公司市值/公司盈利，公司的市值变化和公司股价的变化是一一对应的。因此投资期内股价的变化取决于市盈率PE的变化和公司盈利E的变化。
Assume that at the beginning of the investment period, the stock price is P1, the P/E ratio is PE1, and the profit is E1;
At the end of the investment period: the stock price is P2, the P/E ratio is PE2, and the profit is E2.
Then the formula is obtained:
P1=PE1×E1
P2=PE2×E2
Transformed:
P2/P1=PE2/PE1×E2/E1
So P/E ratio and earnings are the main factors that affect the stock price, but in addition to the changes in the stock price, there is also an important factor that affects earnings, that is, dividends.
The points of the index fund represent the average share price of a basket of stocks. The dividend of the index constituent stocks is not considered here, but we can receive the dividend of the constituent stocks in the actual investment process. Therefore, the actual investment income during the investment period should be added to the dividend income of the constituent stocks. How to measure the dividend income? This is the dividend yield.
Based on the three factors of the return of index funds, John Borg proposed index funds
