My son has been learning how to stand, walk and even attempting to talk lately, and it struck me that no matter what stage of life you are in, there are always going to be risks in whatever tasks you decide to pursue. For my son, every time he sets out in an attempt to put one foot in front of the other, he is taking on the risk of failing. In this instance he might trip over, lose balance, or just run out of strength in his legs. The result of which is the risk of falling to the ground and injuring himself with a bump to the head, or skinning his knees.
On this blog I talk a fair bit about investment opportunities and how I am looking for create wealth for me and my family. Each investment comes with an associated level of risk and potential consequences should the risk become a reality. Some of the more recent things that I have spoken about have been starting an online business selling physical goods, trading penny stocks and creating niche websites. Each one of these investment decisions has the risk that I will end up losing my money, although some have far more money at stake than others, therefore they have a larger consequence should the risk be realised. Just like my son and his learning to walk, I need to decide if I want to take on the risk of failure to achieve something that I feel is a worthwhile endeavour.
Now having said all that, it should be noted that not all risks are created equal… In my sons case, he has a safety net where by he has learned that his parents will be there to catch him when he falls. This reduces the level of risk that he is taking on board – provided he is able to trust in my wife and I to catch him. In my case there often isn’t a safety net when it comes to financial investment decisions, so I have to take a more holistic view of things. This normally involves me making a decision based on the following:
- How much will it cost (both up front and in the long term)?
- What is the likelihood of success?
- What is the expected return on investment?
- What time frame should I achieve success by?
- What are the consequences if I fail?
Obviously each decision has slightly different points to consider, but in general those few almost always come up – I recommend using the SMART acronym to help.
For a while now I have been pondering the benefits of an investment property. Buying an investment property with house prices so high in Australia seems to me like a fairly high risk play, and so I have been looking to other opportunities that can produce a similar or better return on investment.
With an investment property I would likely need to spend around $350,000. This would then be rented for around $400 per week, which would leave me out of pocket by about $50 every week (excluding the benefits of negative gearing). In this instance I would be relying on trying to make a capital gain sometime in the future (expecting property to increase by around 3-5% per year) – so this option has a lot of risk involved with it.
- It would cost me a lot of money up front
- There is no certainty around a positive return on investment
- I might not be able to sell the house when I want to for the price I want to
- I might not be able to get renters for what I expect
- Negative gearing might get abolished making the entire thing a drain on my finances
- With such a large up front investment – I am severely handicapping myself in regards to other future investment opportunities.
- Potentially large maintenance costs
- Insurance costs
If I compare buying an investment property with building niche websites things look a bit different.
My total upfront investment per website is around $300-$1,000 per site. From my experience I can normally average around $40 a month or $10 a week for each site without too much difficulty (obviously some are more and some are less). My only ongoing expenses for this include hosting and domain name registration, both of which are extremely cheap.
With this strategy my initial investment will be returned within 1 to 3 years without me needing to spend a huge amount of money to get started. This allows me to invest in other opportunities – like penny stocks, without having to worry about having a massive debt burden.
The main points for niche sites include:
- Small capital outlay (no debt required)
- Quick return on investment
- Better return on investment than property when looking at capital invested vs percentage returned (assuming 3-5% per year growth in property).
- Very low maintenance costs
- I don’t have to worry about tenants or insurance
- The only real negative is that this takes a lot more time than buying a property, but it can easily be outsourced.
What are your thoughts on risk? Do you think things through in a similar manner as I do?