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How to Identify Risk and Return on Your Investment

November 11, 2020

How to Identify Risk and Return on Your Investment

Are you shooting in the dark with your investments? Not sure what the risk level is, or what your return will be? Just crossing your fingers and hoping to see it grow?

Why play guessing games, when there is an easy way to quickly identify high return, low risk investments, even if you’ve never invested in your life!

Sound farfetched? I’m going to make it really simple.

How to Identify Low Risk Investments

Measure risk based on control. How much control do you have over the investment? The less control you have, the riskier it is.

Control = the power to influence the safety and return of an investment

So based on that definition, are the following investments high risk or low risk?

Identify High Risk or Low Risk Investments. Real Estate Investing, Social Lending, Bitcoin, First Trust Deeds, Mutual Funds. Low RIsk or high risk?

How to Identify High Return Investments

Measure return based on Cash on Cash return. When you put in money, how much are you going to get back?

Cash on cash return =  Annual Cash Flow / Total Cash Invested

So based on that definition, are the following investments high return or low return?

Are these investments high return or low return? Judge based on cash on cash return. Real estate investment, social lending, bitcoink, mutual funds. Measure based off of cash flow.

Let try an Example

Example 1: Matthew

Matthew just finished grad school and through working multiple jobs, was able to save about $30,000. Matthew decided to invest this money in Mutual Funds. He saw his money start to grow slowly over the years, and they were now worth $40,000.

When COVID19 hits, the value of Matthew's mutual funds dropped down to $15,000 in a matter of days.

Example 2: Jessica

Jessica's grandfather passed away, and she inherited $30,000. Jessica did her research, and bought a $100,000 rental property, with the $30,000 down. After expenses, she netted $350 in positive cash flow from the rental property each month.

When the market crashed in 2008, the value of Rebecca’s rental property dropped by half, down to $55,000. However, the rental property continued to pay her every month. In fact, she got more inquiries on her property because people were losing their houses and needed somewhere to live.

Now the question is, who’s investment was low risk and whose was high risk?

Now that you’ve learned how to identify high return, low risk investments, hopefully you came to the conclusion that Jessica’s the smart investor! She is still receiving the same $350 a month in passive income, while Matthew has lost most of the money he had worked so hard to save.

Like the idea of low risk, high return investments that generate passive income? Speak with one of our wealth coaches today, who are experts in finding and identifying the perfect investments for your portfolio.

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