Ben Todd | Jun 2, 2017 | 1
Is There Such A Thing As A Safe Investment?
Nassim Taleb’s Book, “The Black Swan” is a book about randomness (not the same as the movie about a ballet dancer). Nassim points out that all swans were white until we discovered black swans in Australia. People were shocked by the idea of a swan that was black because they thought it could never happen. It was a random event that went against what people thought could and would ever happen.
Do you know what other event was like that?
The Wall Street crash.
History Just Keeps Repeating Itself
The Wall Street crash saw a lot of shares and investments fail. Many people lost their life savings, their businesses, their jobs, homes, cars and money. This was a massive event that shook the economy of the world, and people were stunned, shocked and mortified by what had happened, and yet it keeps happening again and again.
Do you recognize any of these?
- The global economic downturn due to the debt bubble?
- The housing bubble due to over inflated house prices?
- The 1990s dot.com bubble where website values were overestimated?
Those were crashes where lots of people lost their life savings, businesses, houses, jobs, etc, yet few people saw them coming. The few lone voice that foretold of the problems were ignored and/or they couldn’t do anything about it.
Here are a few more you can look forwards to:
- Another housing crash in richer smaller countries such as Britain and Japan
- The student debt bubble growing is going to cause more loss than can be sustained
- Asian debt has now pushed world debts to new highs and they will need to find the money somewhere
How Do We Avoid The Inevitable?
You cannot avoid the inevitable. If investments are going to go sideways, then they are going to go wrong. There is little you can do about it, but you can lessen your risk so that even if a catastrophic crash happens–you are still covered and may at least get your money back. One of the best ways it diversify your investments this should happen on a macro level and on a micro level.
Diversify on the macro level
This means you should put your money in as many different places as possible so that a few of them are able to fail without you losing everything.
Here are your current investment options:
- Savings accounts
- CDs (certificates of deposit)
- Real estate
- Stocks and shares
- Precious metals
- ETFs (Exchange Traded Funds)
- Mutual funds investing in any or all of the above
- Private businesses
A diverse portfolio means you may have money in savings accounts, commodities, futures, private businesses, etc. A less-safe portfolio may only have money in one area such as in a private business or in stocks. If you have a diverse portfolio on a macro level, then it means you can absorb loss and still come out on top.
Diversify on the micro level
When you enter a marketplace or area of investment, you should diversify your investments again. For example, if you are putting money into savings accounts, then open up a few savings accounts with different banks and building societies and put money into each of them. There are so many savings accounts that each have their own perks and limited-time offers. There is nothing stopping you from closing one account and opening another to take advantage of its new starter offer, and there is nothing wrong with you having a few different savings accounts.
Diversify whilst in a marketplace or area of investment. For example, if you are putting money into buying shares, then do not put all your money on one company. You may like to put your money into a single sector, such as pharmaceutical because you know that sector, but you should still put a little money in other sectors to be on the safe side. For example, there were many people that put all their money into online businesses, which was a booming sector, but they lost everything when it all came tumbling down.
How Much Stock Should You Put In Trends?
Nassim Taleb tells the story of the turkey. He is fed every day and keeps track of how much he is fed. As the turkey fills out his feeding chart, he notices that the amount he is fed goes up by a little bit every two months. As he becomes bigger and stronger, he notices the amount he is being fed goes up. To him it seems like the good times will last forever, but little did he know that tomorrow was Thanksgiving.
The trend the turkey saw was a gradual increase without any indication that things may stop or go wrong. Many investments look the same way. On the shares market this is always the case, but the global economic downturn showed us that even strong and well-known brands can fail, even if they have had decades of steady growth. Similar things happen with other investments, such as how house prices were slowly rising until the housing bubble burst.
Taking a look at past trends is a nice way of predicting the future. For example, if a company does well in the summer and badly in the winter, then previous year’s trends may help you make an accurate prediction for the future year, but there are no guarantees. For all you know the company may be robbed by Chinese hackers, or may be taken over by a company that strips it. The truth is that trends only help us feel a little safer with our decisions, it is better to know them than to not know of them, but their actual value is far less than other people would have you believe.
What Is The Safest Investment On Record?
The safest investment of all time is bonds. The return never changes, so you can predict what you are going to get in return, and the principle always gets repaid, which is not something many other investments can brag as consistently as bond.
If you see the investment through all the way to the end of the term, then you will definitely get your money back along with the promised interest. Large corporations offer bonds, as do local and national governments.
You may also sell your bonds on the free market, but many times you get less than what you paid for them. Still, if you do not “some” money right away, then you can liquefy your bonds so your money is not tied up for the entire term.
Bonds are not very popular with many smaller investors because their money is tied up for a long time, they are not big earners in terms of profit, and they are rarely shown in the media as a way of getting rich. If you want to get rich slowly and a little more safely, then bonds may be the way for you.
Getting Rich Slowly May Not Be For You
If you want to get rich slowly, then diversify on a micro and macro level. Taking the safer route means you are not going to become rich quickly. Your wealth will grow slowly and you will have to keep adding your income into your wealth-building investments in order to fuel the growth of your wealth. So long as your investments are diversified (varied), you will enjoy a safer level of wealth building and growth.
Getting Rich Quickly May Be More Your Thing
If you want to get rich quick, then you need to take a lot of risks. The riskier investments are more likely to suffer a catastrophic loss and you are more likely to lose all your money. On the other hand, riskier investments tend to have a higher payoff, and sometimes they make people rich. The only problem is that the risk is very high and every investment you make is a gamble.
Some say you are gambling every time you invest in something, which is true, but even the level of risk in gambling can be lessened. For example, when gambling you can put all of your money on an outsider and win big in the unlikely event the outsider wins, or you can put each-way bets on the favorites to win and enjoy a smaller but more likely return on your bet.
Even gambling can be made safer, in the same way that investing can be made safer. For example, investing in a company that has been around for years and has a great track record is far safer than investing in a startup company with an untested owner. However, with a startup investment, the money you spend is far less than with an established investment, and the potential return (albeit a risky one) is likely to be far higher in the long run.
The reason you may like to try riskier investments is that you do not have an income that allows you to save a lot of money that you invest. Otherwise, you may simply be impatient and do not want to wait for years before you build a lot of wealth.
How you build wealth is up to you. Try riskier investment with a smaller input for a quicker potential outcome, or try longer-term and diversified investments and build your wealth over a longer period of time.