No Safe Bets: Invest to Stomach some UncertaintyRon Hickey CFA, CFP®, Wealth Advisor
I WILL NOT crave certainty. Although it’s our nature to seek assurances, “safe bets” in investing are either frauds or won’t deliver returns that keep up with inflation.
There are two types of “safe bets,” both of which promise a guarantee, but one results in financial hardship much more suddenly.
Bankers refer to the first type of “safe bet” as a deposit account. The second type is typically referred to as fraud, but conmen prefer descriptors, such as “risk-free” and “a sure thing.” I’m not sure about you, but I prefer door number three; it’s called uncertainty.
Bank deposits tend to earn low single digit returns, while at the same time the cost of living is climbing more quickly than your investment growth. If your nest egg generated 1% per year in interest income – the worst type of income from a tax perspective, by the way – while at the same time your cost of living was climbing by 3%, how much poorer would you be in 10 years from now?
“Leaving your money in cash, or near cash equivalence, is a great way to go broke slowly.”
—Ron Hickey, CFA, CFP®
To quote Yogi Berra, “a nickel ain’t worth a dime anymore.” This should be a reminder to us that cash isn’t a good investment for the long-term, especially if it’s hidden under your mattress and isn’t earning anything at all.
The second type of “safe bet,” the ones that make you go broke suddenly, usually advertises little or no risk at all, while at the same time “guarantees” a high rate of return. Charles Ponzi’s scheme promised clients a 50% profit within 45 days, or 100% profit within 90 days. Hindsight is 20/20, but even those returns should have sounded too good to be true.
With reference to the chart, there is a positive relationship between risk and return. Higher returns do not come without added risk. In other words, there is no such thing as a free lunch. If your goal is to preserve wealth for generations, then you’ll need exposure to investment risk – so long as you can stomach some uncertainty.