Therefore, to explain the concept of cash flow investments, these are – as the name clearly suggests, investments that have a lucid and reasonably definitive cash flow, as opposed to other investments which are more speculative in nature. In other words, when you invest in cash flow investments, you know with reasonable certainty that you WILL receive a certain rate of return. On the other hand, with speculative investments, there is no guarantee that you will actually receive the probable rate of return; you may very well receive a rate of return which is substantially higher than the expected rate of return and at the same time, you may also receive a rate of return which is actually a whole lot lower than the speculated rate of return. In other words, there is a lot of uncertainty revolving around speculative investments.
Given this understanding of speculative and cash flow investments, it should not be too difficult recognizing and differentiating between them; let’s consider some examples…
Purchase of property for investment purpose
Quite obviously speculative; you cannot be sure to any extent with regard to the future valuation of properties. Even in those cases where the market in the present seems to be all fired up, with property prices at an all time boom (the way things were in 2005-2006), there is no guarantee to the extent to which these valuations would be sustained. Nor is there any assurance that property prices will not fall dramatically – there can be major price movements, whether upswing or downswing.
Company Stocks
Again speculative; company stocks can see upward or downward movement with unpredictable regularity. Further, valuations of company stocks are dependent on a host of multiple extraneous factors which are not only beyond the control of investors, the company owners and management also find it tough to predict with any degree of certainty as to how the company stock will swing.
Rental Properties
These are largely non-speculative or cash flow investments. In the majority of cases, even with a depressed property market, the general observation is that rentals continue to be sustained. This is especially true in the case of lower priced rentals of cheaper properties as opposed to more expensive ones which might see a steep drop in rentals at the time of a bust in the property market.
Small Businesses
These are certainly non-speculative in nature as well. Once established, majority of small businesses continue to function seamlessly. At the same time, be informed that there are a large number of small businesses across America that do fail. Yet, the percentage that does not is far greater than the ones that do. Further, the overall speculation in the case of reasonably well entrenched and firmly established small businesses is usually a whole lot lower than highly speculative investment avenues such as property purchases.
------------------------------------------------------------------------------
Now that we have looked at some examples of both speculative as well as cash flow investments – and also identified the key traits of each of them, it is time to lay out some normative guidelines with regard to the suitability of either of these investments.
Typically, it is cash flow investments which clearly seem to have an edge over speculative investments. Although the gains in the case of speculative investments can be substantial, often leading up to what is known as windfall gains, the opposite is also remarkably true wherein there are numerous cases of huge losses as well.
In that sense, cash flow investments seem to take a well balanced, middle path approach to the entire facet of investments. While there may be lesser chances of making huge profits, there are also far less chances of making stupendous losses. Further, even with minimal profits per investment, one can actually witness a substantial rise in overall profitability, as the overall number of investment avenues is increased dramatically. For instance, if you have a cumulative set of say 10 different smaller properties generating rental income on your behalf, the gross rent receipts coming in would certainly be substantial.
This brings us to our final words on this matter; if you are looking to choose between speculative and cash flow investments, you would most likely be better off investing in the latter. The only times when speculative investments seem a greater attraction than cash flow investments is when you have substantial surplus cash reserves which you know you will not require in the near future, given other liquid investment instruments that you have already put in place. With that being the case, you can definitely afford to invest in speculative investments and reap rewards, as and when they arise.
