Return on Investment = the net profit / the total investment over some period of time and is expressed as a %.
That much is easy to agree on , what is much harder to find consensus on is what that % should be? Is 2.5%, 5 % or 10% enough of a return? Should you be expecting 25% or even 50% returns? Can you realistically expect to double, triple or do even better on your investment?
The crazy thing is that the answer to each of the above questions is yes dependent on your time frame and attitude.Obviously this pair of variables that is uniquely different to each individual, thus the constant confusion over just what the right answer is.
The time frame is a part of the formula that is determined simply by when you want your resources available to you again, or over what period your are looking at the performance of your investment. It is almost always discussed in terms of the return over a 1 year period. Thus if you flipped a house in 6 months and made a $20,000 profit on a $200,000 investment you would have received a return on your investment of 10% in 6 months , which = an annual ROI of 20%. Congratulations!
The "attitude" portion as you might expect is where the sticky emotional part is found. This is not a function of a formula, but you will need to nail down an acceptable answer that can be extrapulated into a general range in order to pass judgement on future formulas. It is your "attitude" towards Risk that matters most in determening whether a particular Rate of Return (another way to say ROI) is right for you.
If you are willing to flip a coin for your life savings then you have a high tolerance for risk. If you are the average 50 year old that would be a $98,350 flip with a downside = to 100% of your savings. If you win you get a great ROI but if you lose you are starting over or depending your time frame (age) you may be out of the game. If you are a 30 yrs old that bet may only be $8525 and the time frame for recovery is much longer. I am not suggesting that your age is the deciding factor for risk but that it is one factor among many.
There are many choices when it comes to Investments and they all should be examined with a two sides scale that weighs both their expected Rate of Return and their Potential for Risk.
I want to point out that it is their Potential for Risk that you should be concerned with, not the rose colored view of risk presented by some "Financial Advisers""Real Estate Agents" and other salesmen including myself.
Remember the words of "The Oracle of Omaha" Warren Buffet himself;
1. "Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1."
In the next post I will pull out the scales and weigh some of the options available to each of us today.