19 Jan Investing for Cash flow vs Capital Gains
To start of with, there are 2 main reasons people invest which is either for “Cash Flow” or “Capital Gains”. Before start discussing into details of this, just to ensure everyone is on the same page:
Capital Gains = Investing in an asset at a lower value and waiting for it to raise and meet your expectations. Examples: Real estates, stocks, etc
Cash Flow = Investing on an asset that produces positive “cash”. Examples: dividends, interest from banks, etc
So the question now falls down to which one should you invest in? My answer, it depends. It depends on your objective of the investment, purpose of it, what are the goals you want to achieve out of it and many more consideration. There are pro’s and cons to everything and of course you need to be clear what is your direction and how you want your investment portfolio to be. So lets discuss each of it:
Investing on an “asset” and hoping/waiting for it to increase value is a test to you. We can never be certain whether the value will increase regardless how much research or homework you do. There are a lot of market sentiments that is out of our control and can affect the value of invested asset. What I mean by that is for example, after doing much research on a stock and you invested in it but suddenly there is additional taxes introduced by the government. These are things that is beyond our control and the main risk of investing for capital gains. Invested on something by the value of the asset might not necessarily increase and worst case scenario decrease. But of course there are pros to it too. Investing for capital gains can give you much higher return. For example, invest directly into a particular stock can give you much higher return than what a bank or any dividens can give you.
Cash flow is a more conservative investment principle. Upfront having cash in your pocket will certainly give you more comfort than the unknown future. The strategy to this principle is purchasing an asset then can “give” you cash everytime. Some will give monthly, quarterly or yearly depending on the different mechanism. The cons of investing just purely on cashflow might give you lesser return. For example, put all your money just in Fixed Deposit might just give you 4% return per annum compared to investing for capital gain might give you >4% return over night. You get the picture
My take to this 2 principle and how I balance them. Same as what I started, know your objective and invest accordingly. What I do personally (no right or wrong but my personal goals), is basically having enough assets that can sustain my lifestyle. If my asset is sufficient to generate revenue to meet my objective, invest for cashflow. I know I can get it during the fixed period of time. However, at times that I do not have enough cash to purchase asset I will invest by capital gain and once it hits my target, I will sell it and switch it to cash flow portfolio.