Cashflow Patterns

All investments are basically cash flow patterns. For instance, a bond involves an investor paying some lump sum upfront and then receiving a series of cashflows for a specified time, with the principal being returned upon maturity. When you buy shares, you expect a series of dividends over time and then hope to sell at a higher price, capturing both the return of the principal and any accrued capital gains.

With land, you pay a lump sum upfront and then sit and wait to sell after some time at a higher price. Rentals involve a large upfront investment followed by a series of net rental payments and possibly a capital gain when you sell the property. Startups and businesses often involve negative cashflows for several months or even years until you break even and begin to generate profits.

Understanding cashflows is important because it enables the investor to choose the right investment given their circumstances, risk profile, and investment objectives. If you want to preserve wealth across generations, then land becomes an obvious choice because the huge payout is far out into the future. If you have young children and school fees are pressing, then something like a treasury bond with regular, predictable cashflows becomes a better choice.

Real estate involves huge capital outlays and is appropriate for high-income earners and those who can easily access cheap capital. A microbusiness with a short breakeven curve works for small income earners. Equity investments generally work best for people with some patient capital at their disposal.

Each cashflow pattern presents different return/risk characteristics. Bonds with their predictable cashflows are generally considered low risk. On the other hand, the cashflows from a business can be impacted by a number of factors—market dynamics, customer adoption, competition, and even regulation—which is why startups and businesses are generally considered high risk.

Depending on the cashflow pattern, we can estimate the return using metrics such as Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period. These tools help investors compare different investment options objectively. For instance, NPV tells you whether an investment adds value in today’s terms, IRR gives you a percentage return to compare against your hurdle rate, and Payback Period tells you how long it will take to recover your initial investment.

In summary, seeing investments through the lens of cashflow patterns helps strip away the noise and reveals what really matters: when, how much, and how reliably money flows in and out of your pocket. A clear understanding of this concept allows you to structure your portfolio to match your life stage, goals, and appetite for risk. The table below summarises the characteristics of some of the most common assets available.