As we fast approach the end of the year I thought it was a good time to take a look at my active music royalty catalogs to see what my annualized rate of return is. I was happy to see that I'm averaging an 8.25% return on my investments!
So how do I determine my rate of return? Let me first explain the importance of depreciation.
As I've discussed in previous posts there's a depreciation element that must be accounted for when determining your rate of return for anything other than Life of Rights music royalty investments.
Assume you bought 10 year royalty rights for a song (which is a standard offering on Royalty Exchange) for $5,000. At the end of the 10 years the rights expire & your royalty rights will be worthless. It's not like buying stock where, unless the company goes bankrupt, your stock will be worth something long into the future. These rights simply convert back to the original owner at the end of your term. So you must depreciate this asset and track your revenue against that depreciate to determine your rate of return.
To further illustrate let's compare the difference between investing $5,000 into 10 year music royalty rights vs. investing $5,000 into the stock market.
If you were to take that $5,000 and invest it in the stock market you would determine your rate of return by simply comparing your initial investment to the current price for that investment. Lets say over 10 years that stock you purchased went up $7,500 - leaving you with $12,500 in your account ($5,000 originally invested plus $7,500 in appreciation). Your return over those 10 years would be 150%.
Now lets compare that to a music royalty investment. Lets say that your $5,000 of music royalties brought in $7,500 of revenue over that 10 year period. At then end of 10 years you'd have $7,500 in your account. So your profit would be $2,500. Thus your rate of return over those 10 years would be 50%.
This hopefully explains why accounting for depreciation is vital in determining your rate of return. Now if the music royalty you've invested in is for the Life of the royalty, then this depreciation factor becomes less important.
My Return Breakdown
Alright, so here are the deets of my current active music royalty catalogs:
Artist: The artist of the songs for the catalog.
Total Depreciated: How much of the catalog has depreciated. Here's the formula:
= Purchase Price - ((Years Remaining / Years Remaining at Purchase) * Purchase Price)
Total Revenue: How much revenue I've collected from the royalty.
Total Return: Total return on investment to date. Here's the formula:
= (Total Revenue - Depreciation)/Purchase Price
Days of Revenue: How many days I've owned the music royalty rights for that catalog.
Annualized Rate of Return: Average return per year. Here's the formula:
= (1+Cumulative Return)^(365/Days Held) - 1
The average return across these 6 active catalogs is 8.25%. The range of returns I'm currently experiencing is .09% - 14.98%. To me this shows why it is important to have multiple catalogs in your portfolio versus putting everything in on just one. This is the same reason why I buy index funds vs. individual stocks. As long as I keep earning the average of this range I'll be pleased with my investment performance.
As I've mentioned many times before, music royalty investing is just a way to diversify by overall portfolio. I do not expect to get rich from these investments. My goal is to simply have money in multiple places that are not tightly correlated with each other. This is why I also invest in Real Estate (single family homes), Stocks (Index Funds) as well as Precious Metals. Gotta keep them eggs in different baskets.
I'll mostly likely post a similar review in 6 months or so. Looking forward to seeing how royalty revenue changes now that many artists are back out on the road as touring is a critical method for driving up streams. Time will tell. (Please don't jack this up Omicron)
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As always this blog is meant for entertainment. I'm not a financial advisor in any way, shape or form. Anything I suggest here will need your own due diligence.