There is an insightful quote by Mark Twain, “I am more concerned about the return OF my money than the return ON my money.”
Many people examine and evaluate an investment’s return when it may be far more important to evaluate an investment’s payback instead. Payback refers to the time it will take to receive your principal investment back from financial benefits. These benefits can be: capital gains, dividends, interest, tax credits, tax deductions, principal payments, and other benefits.
As long as you have not yet received your principal investment amount back, you are exposed to the possibility of incurring a loss on this investment. There are several investments where getting your principal investment back is more important than an average investment:
- Depreciating asset, you need to get your money back while it is still able to produce more income.
- Potentially obsolete asset, you need to get your money back before market changes permanently reduce its value.
- Weak currency risk, you need to get your money back before its home currency drops further than the potential gain on the investment.
- Any other risk that puts the investment in peril and there is no additional income or value at all.
Another benefit of an investment payback is that: your money has been returned so now it can be placed into an additional second investment. You hopefully still have the original investment and now you have another investment – so you money is working double. Another way to view the second investment is that it will yield an infinite return – you did not put money into it, your first investment paid for it. However you view these two investments, your original investment principal is now working in two separate investments on your behalf.
For these reasons, the payback of your investment should always be a critical factor in your investment criteria. Particularly for risky investments or direct investments that need to be managed. Do not be lured with promises of high potential returns if the payback term is not reasonable as well.