Sunday, October 10, 2010

Cash flow and ROI

When we talk about postive cash flow, it means that your current operating income is sufficient to pay the bills and have a bit of a safety cushion in case income falls or costs increase. It is about investment survival.

But it does not tell you whether you make money or better how fast your net worth goes up. That you measure as a rate - Rate of return on your invested money or ROI. The strange thing is, whether you invest in gold, bonds, the stock market, the ROI always seems to swing back to a current average. Depending on the time and sweat you put in your investment you may get better returns.

The current 'average return on investment' is a the middle ground of a range of ROIs. The ROI on low risk investments like a GIC is little and that of high risk junk bonds is a lot. In other words, high risk often spells high ROIs. Investing in U.S. real estate is high risk and if your investment survives it may give you a very high return or in otherwords, you would make oodles of money. If it does NOT survive you may loose all and in some cases even more.

There is room for high risk investments in every investor's portfolio as long as you have enough to cover the losses of such an investment and to 'to fight another day'.

Young people have many days left 'to fight'; old geezers like myself have less and tend to be more conservative in our overall investment behaviour. I think many investors including Don Campbell have extensively pointed out the risks of investing in U.S. Real Estate right now. The choice and the responsibility for the results are yours.

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