Investing your money is about looking at the available options and making a choice. Sometimes this involves making a tradeoff of one type of investment over another. Whenever I’m considering a new investment that will give me more income, I like to weigh the income in dollars from that investment against the risk in the value of the investment to see if it’s worth the income.
First, consider the potential that an investment has to go down in value based on what it has done in the past, and then compare that risk to the income you’ll be receiving. For example, if the investment has a long term history of 15% price swings a year, and it yields 5%, you may wonder if it’s worth the risk of owning it to receive that small amount of income.
Be sure to equate the yield to dollars. For example, if an asset has a 5% yield, meaning that it pays you 5% a year while you own it, and you are going to invest $10,000, then the actual dollar amount of that payout is $500 a year, or around $41 a month. Don’t forget that taxes may have to be paid on the income, depending on the type of income it is and the account type where the investment is held. Is the potential decline in value worth $41 a month?
Investing is about tradeoffs. In this long term cycle of low interest rates, you may decide that you would prefer to leave the money in cash until you find a better opportunity, or that you would prefer an investment with a chance of appreciating in value instead of going for income. By looking at real dollar amounts instead of percentages, it’s easier to make decisions about the tradeoffs you’re willing to make when you’re investing your money.