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Return on Investments

29 April, 2015 - 15:03

The concept of a return on investment is designed to balance all three perils. In finance there are actually two returns: the return of investment and the return on investment. If the investment loses money, you may be able to recover a portion of what you risked. A return on investment (hereafter "ROI", or "return") is the return that finance is primarily concerned with although the other cannot be overlooked. It implies first and foremost a 100% return of investment. In order to do so, the return must therefore

  1. replace the buying power lost to inflation,
  2. make up for and exceed the losses from other financing activities, and
  3. make the investment more attractive to someone than any other option, including spending the money.

Item 3 can be as objective as selecting the best ROI among many or it can be as subjective and personal as whether or not to give up the satisfaction of having dessert every night for a month. Regardless if the investor does not perceive sufficient potential for gain, the money will never change hands.