Investing for Capital Growth or Cash Flow ?
Deciding on whether to invest for capital growth or cash flow, will depend upon your investment strategy. Therefore, a certain strategy may be favourable for one person, and not for another. Deciding on your approach will come down to whether you are looking for additional income, or whether you are looking to build wealth over a longer period of time. It is likely you will combine the two strategies together but be more weighted towards one or the other. Your investment strategy may also change over time.
Cash Flow v Capital Gains Strategy
If you are investing for cash flow you are looking for an investment that provides you a regular income, this could be weekly, monthly, quarterly, or yearly. The investors aim will be to either replace or supplement their current income. They may want to do this so they can quit there job, or they are looking for additional funds to cover their lifestyle. Typically, investors who invest into this strategy will want to keep hold of their investments for their lifetime. It does not matter if their investment reduces in value as long as the regular income continues. An example of this type of investment could be staking cryptocurrency's, purchasing good quality rental properties for the monthly cash flow, high yielding dividend paying stocks, or interest payments within a savings account.
If you are investing for capital growth, you are looking for an investment that is going to increase in value over time. The investors aim will be to build wealth. Typically, investors who invest into this type of strategy will be more focused on the price of the current investment. They will want to ensure that they purchase at the right price, so when they sell, they can make a profit. Therefore, timing and being able to appropriately value the investment is paramount. An example of this type of investment could be NFT’s (Non-fungible tokens), undervalued stocks, property in high growth area’s, or investing in land with the hope to eventually gaining planning permission.
What strategy should you choose ?
This is something that is continuously debated and professionals will provide different answers. However, it is heavily dependant upon your goals, for example, if you are looking for “financial freedom”, or you are wanting to quit your job, then you are going to be looking for a cash flow strategy. Contrary, if you are looking to generate wealth, then you are going to want to look for a capital growth strategy. Therefore, the cashflow strategy could be considered shorter term as it will allow you to live the life you want temporarily, the capital growth strategy is longer term and focuses on building wealth.
A good investment would have both cash flow, and capital growth, which is why property is a favoured investment vehicle.