Sizing up your investments

So lets recap: you’ve got a fresh budget, expenses are being tracked online, spending limits are set and there’s a few extra benjamins winking at you with each paycheck.  It’s about time to consider investing.  Don’t let the cheddar sit idly in the bank, put it to work.

A good starting point in choosing an investment avenue is to consider Return On Investment (ROI).  This is a handy yardstick that sums up how efficient (profitable) an investment will be.  The formula is straightforward: 

ROI = (money being made – money being spent) / total money invested

Multiply the ROI by 100 and you will get a percentage, obviously the higher the ROI the better the investment but there are some exceptions.  ROIs do not reflect how much risk is involved and they do not take into account how much work is required.  For example, investing $10,000 in a conservative diversified portfolio may only produce an ROI of 5%-10%.  That’s as vanilla as Martha Stewart baking an apple pie.  Buying a rental property, taking on a mortgage and finding a tenant could produce a much higher ROI.  In this case you get to live out your fantasy of being a superintendent!  Smuggling cocaine from Columbia and pushing it onto the mean streets of Toronto could net an insane ROI.  This last case takes into account your willingness to spend the twilight years of your life sharing a cell with “Big Tyrese”.

The goal is to find that sweet spot.  Consider how much effort you are willing to put in and how much risk you can tolerate.  There are more important things in life than making money efficiently.  Sometimes it’s better to pick the lesser ROI, especially if it means not having to spend your evenings making shivs from toothbrushes and soap.

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