Return On Investment vs. Return Of Investment

When considering investments, most of us consider the Return On Investment (ROI) when evaluating our options, but we may forget to consider an even more important metric – Return Of Investment.

First and foremost, the return of your invested capital is the most important consideration when making an investment. For the purpose of this article I am talking about investing rather than speculating, although the same rules still apply. With speculation, there is a greater risk of loss, but greater upside potential to go along with it. Assuming our primary goal is building long-term wealth, we want to ensure our principal is safe as we put it to work to earn a return.

An Investment Gone Wrong

Nobody likes to think they’ll be the one to fall victim to a con, but most of us have been taken advantage of in some way or seen some type of agreement go sour in our lifetimes.

As a simple example, consider the smooth talking salesman driving a flashy car and sporting Prada pants. While that person may have the outer trappings of affluence and appear to know what they are doing, they may just as well be the next Bernie Madoff luring you into their scheme. Let’s say we loan $50,000 on a deal with our slick new friend and are to earn a fixed 10% return for a 5 year term. Our new investor pal can use the first $25,000 to make our interest payments for 5 years, and then use the other $25,000 to go on a lavish vacation. In this case we’ll be 5 years older and $25,000 poorer by the time we figure out the investment is bogus, not to mention the stress that will come along with trying to recover our loss later on.

5 Rules to Ensure Return Of Investment

Here are 5 quick rules to ensure you get both a return of your investment, and a return on your investment.

1. Only invest with those you trust
   If there were only one rule, this would be it. Ensure you invest only with people of character, people who honour their word, and people who will treat your money like it is their own.
2. Understand the investment
   Before making any investment, make sure you understand how it works. Most sound investments can be explained within 30 seconds. If it takes any longer than 30 seconds to explain, be wary.
3. Understand the risk/reward relationship
   In the world of money, reward is commensurate with risk. If someone is offering an exorbitant return, do you understand the exorbitant risks to go along with it? Keep in mind here that if something sounds too good to be true, it probably is.
4. Do your due diligence
   No matter who you are dealing with, be sure to complete your due diligence on both the partner and the deal itself. Verify the facts involved, ask the tough questions, and be sure everything meets your standards before handing over a cheque.
5. Get references
   Before investing with someone, ask for at least 3 references who have invested or done business with them in the past. If someone cannot provide you with 3 positive business references, they are probably lacking the standards or track record you’re looking for in an investment partner.

Follow Your Sixth Sense

By following the 5 rules above, your sixth sense will let you know whether its time to invest, or not. If the deal passes your “gut check”, go ahead and put your money to work. On the other hand, if you’re still skirmish, ask some more questions, get the clarification you need, or simply pass on the deal knowing another opportunity will present itself shortly.

photo credit: rick