I went for an evening walk earlier and during that one hour, I thought about many things. Well, that isn't unusual for me. I think too much, many tell me. One of the things I thought about was the issue of debt used in investments.
For example, how risky is an investment for which the debt is meant to fund? People always wonder how to measure risk properly and there are people who are paid to study and manage risks. I am not a professional in this area and I only have a very simple understanding of the matter.
One consideration which is probably universal is that of time. Time? Yup, time.
Basically, the longer a business investment makes me wait before I am rewarded, the riskier it is. The prospective returns will have to be much higher to compensate for this risk. So, if debt is used to fund an investment with a long gestation period, I would consider it risky and would require a much higher return to be interested.
If an investment would generate income very soon, then, the use of debt in such an instance could be considered to be less risky. In such an instance, I might be quite happy with a lower return on investment.
Another example of a question to ask is whether the benefits generated from the investment are sustainable. If the benefits generated from the investment are sustainable, then, the use of debt to magnify the benefits would make more sense.
Debt can be good or bad. It is too easy to say that we should avoid highly leveraged investments but we really should examine each leveraged entity closely and not generalise.
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2. Secret to avoiding financial ruin.
3. Get on top of your finances.
4. Snowballing towards bankruptcy.
5. Total Debt Servicing Ratio (TDSR).