You have a cow, your last cow, and your mother sends you to the market to sell it and get some money for food. On the way you meet a man who offers to buy your cow. Great! Except he does not have any money, only a few magic beans. They look ordinary enough, but they can make you rich, richer than the richest person on earth. Do you (a) take them or (b) carry on to market and sell the cow?
This story may sound like a fairy tale, but the situation is very real life. Bank interest rates are falling even further below 1% (i.e. for every dollar you invest in the bank, you earn less than one cent in the future) and there are many investment opportunities popping up everywhere. You are Jack. And for those who don’t know Jack (pardon the pun), investing can be scary.
I often hear 2 scenarios: the safest place for your money is under your bed and the safest place for your money is in my company. But are both true? Is either true?
Overview
Risk is broadly measured as the probability of an adverse event multiplied by its impact. For example, the risk of being infected by COVID-19 is low if you self-quarantine, because the probability or likelihood of coming into contact with an infected person is low. Similarly, following the protocols of wearing a mask and sanitizing your hands reduces the risk of contracting COVID-19. Although you may come into contact with the virus, these measures reduce the concentration of the virus entering your body, only slightly impacting your immune system.
Now, investment risk is the probability of the occurrence of losses, relative to the expected return on any particular investment. In our story, Jack should weigh the likelihood of the beans being magical against what he could gain by them being magical. Then he should weigh the likelihood of someone in the market buying his cow, against what he could gain at the market for his cow. But since the cow is not his, he should also weigh his mother’s response; that is a lesson for all of us.
Risk Appetite
Many investment companies sell the expected gains to you. “Invest $300 for 25 years and you can gain $500,000”. This may seem good but if you have lived for at least 25 years, you know that a lot of things can happen during this time. I am not against long-term investments and diversifying your portfolio, for it is a wise practice, but as you digest information you should look at it through the lens of what you have. Some folks like to jump with both feet; some like to dip their toes and cautiously enter the pool.
The first rule of investing is never invest what you cannot afford to lose: my first and only advice, anything else are suggestions. CLICO and British American are no secret…and it is no joke. A lot of people lost big time in the last few years, and it will happen again. That is the risk of investing, there are winners and losers. It is a bumpy ride through market movements, and you must have the resources to survive the game.
If you cannot part with $300 a month, then it does not matter how much you will make in the future. As the adage goes, “while the grass grows the horses starve”. Smaller investments may provide smaller gains, but the inflation rate keeps rising and so does unemployment. Your liquidity is just as important as your other asset value. We still have our own personal debts to deal with, our school fees, food and gas, mortgages/rent; and we should always keep something in our pockets for emergencies.
So, let’s suppose you have the money and you can part with it. How do you choose which one(s) to invest in? This is where your risk appetite comes in. Guaranteed money (low risk) investments tend to have low returns. If you put your money under your bed or in a bank, you can come back and find that same money; no more, no less. High returns come with high risk, you may gain all or you may lose all.
The old people used to say do not put all your eggs in one basket. This is true. If you can part with it, put it in short term investments and long-term investments. Put it in high risk investments and low risk investments, with the understanding that you win some and you lose some. Wealth is not something that comes overnight, it is often a slow and steady string of smart choices. To borrow from the Jamaicans, “one-one cocoa, full basket”.