Are There Any Safe Investments Anymore?
| March 7, 2012 | Posted by Roshawn Watson under Uncategorized |
By: Roshawn Watson
“The soul would have no rainbow had the eyes no tears.”
Many of our actions are driven by our desire for safety. From having an emergency fund to carrying insurance, we all want to know that we’re going to be okay. Recent economic events have cast doubt on the financial plans of many. Rules that were seemingly unequivocal began to no longer apply to the new economy, where historical annualized returns weren’t predictable, home values had net depreciation, and gold had a tremendous ride to the top. During such times, many understandably want to flee for cover, but therein lies the most important question: “Where to: are there any safe investments anymore?”
Have There Ever Been Safe Investments?
People have always assumed some level of risk when building wealth anyway, regardless of whether we were investing in the financial or real estate markets or becoming business tycoons. “Sure things” typically amount to hype and empty promises mixed with a large amount of confidence. Perhaps, the primary lesson the most recent economic debacles highlighted was that real risks still persist. However, these risks aren’t generally new; it’s our awareness of existing risks that’s been expanded. For example, the markets have well-documented histories of cyclic booms and busts. While it is easy to be cavalier during the “good” times (such as during the dot-com and real estate bubbles), it is when things aren’t going well that we discover our true risk tolerance. Hopefully, that doesn’t mean that we should, like a record number of young people, avoid investing, but rather embrace investment strategies that minimize risks while providing reasonable returns. If we simply retreat to saving or put money in CDs, it will lose purchasing power due to inflation and taxes. Also, it is hard to really capitalize on the long-term magic of compounding interest and appreciation at the “jaw-dropping” rate of 1.48% (the current national overnight average for a 5-year CD).
In short, the issue was never whether there are safe investments, as risks were always inherent, but rather which investments are appropriate for our current level of risk tolerance?
Investing Has an Encouraging Track Record
The history of investing is still encouraging. Data suggests that long-term investors win. This is just as true today as it was 50 years ago. Some may ask, what about the “Lost Decade?” That’s the period from 2000-2010, where the S&P had an overall -1.25% return. The whole Lost Decade hypothesis relies on a series of assumptions that lack validity for the majority of investors. For example, most people don’t do 10 years of investing all at once, and most people aren’t exclusively invested in the S&P. Additionally, fixed-income funds have outpaced stock in the last 10 years; small cap investors (Russell 2000) have had an annualized return of 6.3% and MSCI Emerging Markets Index returned 12.3% annually (as of January 2011). Even if you went all the way back to post World War II, the S&P still returned an annualized, inflation-adjusted 5.8% as of January 2011. That’s significantly less than the much touted 12% but still whole a lot better than what you would get from many alternatives. Of course, the good track record is not limited to the stock market. Even though the current property appreciation rate and pricing data aren’t particularly impressive in many markets, consider the overall returns real estate investors who are leasing their properties to tenants with little to no debt. The point is even in “down” markets, some people are making money through their investments, and the overall track records overwhelmingly supports long-term investing over not doing so.
Investing and Self-Fulfilling Prophesy
One of my favorite quotes is “think you can or think you can’t, either way, you’re right.” About eight years ago, I was preparing to take a Biopharmaceutics exam, and I wasn’t my usual motivated self. This was not my favorite subject, the weight of this exam was high in relation to the overall course grade, and the exam was described as pretty intimidating. Anyway, at one point, I decided to throw myself a pity party. Fortunately, a friend told me, “well if you think you are going screw it up, you will.” YIKES! That’s was all I needed to hear to mentally get myself back into gear to ace the exam. The point is, it would have been just as easy for me to accept that exam as too difficult based on others’ reports and the negative thoughts that I was battling. Had I done so, I have no doubt I would not have performed very well. The legend of the exam’s difficulty was accurate. As I recently mentioned in How To See a Bright Financial Future, we tend to move in the direction of our most predominant thoughts, so my thoughts about my performance on the exam were relevant.
Don’t minimize the influence your thoughts have on your ultimate performance, whether your challenge is taking a pivotal exam, acing a job interview, investing, or starting a business. This is one reason I don’t particularly listen to doom-prophets with respect to the economy. I believe most mean well and raise reasonable concerns sometimes, but they are coming from only one perspective, and it’s a limiting one. If one fully embraced their vision of the world and sometimes the corresponding hysteria that goes with it, what reasonable person wouldn’t be scared to invest or start a business endeavor? That’s a price far too high to pay for the benefit staying completely “informed.” My stance is to collect the needed data while performing due diligence, but don’t allow fear to stop you. Fear will rob you of the very ambition and momentum necessary to manifest your dreams.
Inactivity is the biggest thief of opportunities.
Concluding Thoughts
Financial challenges are nothing new. From the real estate crises in the 80s to the one in the 2000s, from the stock market crash of 1987 to the decline noted from 2007-early 2009, from high unemployment of 1983 and 1992 to the high unemployment now, I think we’ve been down this road before. Sure some of the players and terminology have changed, but in many respects, it’s the same old dance. Accordingly, just like it would have been a mistake for most to avoid the markets from 1980 to 2010, I believe it is likewise a mistake to avoid the markets from 2010-2040. Notice, in no way am I saying that the land is not occupied by giants. I’m saying you are well able to conquer them. Decide today which report you will believe, for that will determine your courage to become wealthy.
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I'm studying the great depression with my kids (11th grad AP History). Although I was already familiar with the period, it's always alarming to go back that far in history and see that people haven't changed much. Then, people saw big gains for a few years and decided to opt for a quick easy buck….which didn't end up being either quick or easy.
Today, it's much the same. Investors who win (in my little opinion) are those who understand the risk inherent in any investment and then take steps to mitigate that risk. They don't become so afraid that they don't invest….that would defeat their purpose. Instead they (can't believe I'm gonna write it!) become educated.
Another fun read, Dr. Watson. (Don't know if you're a PhD or not….I just like the Sherlock Holmes reference…..and I'm not talking about those silly movies, either. You're way better looking than Jude Law, I'm sure.)
Agreed. Investor's who win, as you put it, manage risks. They don't try to eliminate risks because that's too risky in itself. History does repeat itself, which can be a revelation in itself. I definitely caught the Sherlock Holmes reference. My mom's former best friend was named Holmes, so I heard all the jokes growing up 🙂
Financial investments will always be risky. But a smart investment in yourself (learning a new language, learning a new skill set, gaining knowledge) is usually worth every penny!
Hey Dave, That's a great spin on the topic. I agree. Investing in you is vital. I'm working on a post where I discuss just that. I try to revisit the topic ever so often anyway, as much for me as I do for others. I am a big believer in continuing education, so it hits home.
Living is risky, but it is better than the alternative (or so I'm told). The long term direction of the market is up….. just look at graphs at the market from the early 1900's until now….. lots of major corrections along the way that barely register now on the long-term trend line. Emotions are a tough thing to control.
Haha Biz,
You are so right!!!! That's a great example. How does one top that? You are so right about looking at the data long-term. It's amazing how many things are "major events now" for our economy that are inconsequential long term. You're right: it's the emotions that we must keep in check. Insightful comment!!!
One thing that stands out today when compared to the past is that investing is affordable! From commissions, to access to company reports today's investors have a lot going for him or her. It would be a pity to not take advantage of this.
Investing is more affordable now. The online discount brokerage firms have definitely decreased a barrier. Now, more than ever, I think more people are in a great position to take control of their destinies. It is a shame when we still operate like someone has to hold our hands before we can take the next step.
People will look back in 30 years and marvel at the investment opportunity we have today. A smart person with a laptop has at his fingertips the latest research on scientific endeavors around the globe. Never has the world had this information.
I agree so much. I think far too often, we assume that our disposition in special. Yes, we are special, but so were people 30 years ago, and so will people be 30 years from now. Thus, we're uniquely suited for now, and we should be ready to capitalized on this!
I really try not to buy into too much of what is reported and look to find the truth for myself. If we all did our investing by reading the paper, we'd never get anywhere. My approach is to study up and take calculated risks, it's worked so far 😉
Shaun,
That sounds like a really good strategy. The mouthpieces sometimes have their own agenda. They'll sensationalize an obituary if they could get more eyeballs. I'm with you too on the taking calculated risks. It's very important not to forsake being in the market altogether due to fear!
I am tempted to say 'not safe enough'. But then I will say this, won't I? Just finished writing an article about the differences between women and men and on eof the most important ones, I believe, is that women are inherently more conservative. So whilst there are no safe investment (there is no safe getting out of bed, for that matter) whether one would invest in the current climate or not depends on what they consider acceptable level of risk and how they cope with uncertainty.
I wholeheartedly agree with your hypothesis. The sad truth is that we often don't know our true risk tolerance until we've been through something. That reveals whether we are comfortable making the "right" decision during the struggle, or if we need to adopt a different approach. I'm okay if people want to be more conservative too, but just don't decide to become more cavalier at precisely the wrong time. Also, be willing to adjust your numbers and retirement plan accordingly to account for the fact that you are not going to have as much skin in the market as you "should."
Spread out the investments – try out different avenues, and you'll never regret having not taken a chance.
DIY Investor is right, we have ALL the information we could ever want at our fingertips… so there' s no excuse for not researching, planning and analyzing before taking the plunge.
Agreed. Robert is so wise. I don't think people would regret their decisions, provided that they embrace financial literacy rather than simply going by the gut. If you have a good understanding of what is going on, I think it is not that challenging to keep a healthy perspective and to make some real money, especially over the long term.
First off, love the quote – I had it on the wall of my bedroom as a kid. Secondly, there ARE safe investments – but they might be too safe… and, in some ways, sticking with an investment that doesn't really help you enough is downright dangerous.
The quote is rather new to me (I'm assuming you are referring to the first one), but I like them both 🙂
I think you provided the perfect response to your critique of investments that are "too safe." Anything too sterilized typically means that you generally have VERY little upside and tie up capital that would be way more profitable if it was spent elsewhere. A 1.5% CD is NOT safe IMHO because a person is losing money to inflation and taxes.
Even after 4 years the fear of another crash is pretty apparent. Savings rates are higher but the money still hasn't been put back into the stock market. Most of it is sitting in money market accounts with the a small portion in stocks and bonds. The issue is entirely psychological. Ask anyone who lived through the depression or had parents live through it, you'll get a good sense of how a large portion of the public trusts the markets now. I'm not sold that education is enough to cure the inherent fear.
I agree. I do appreciate the new found frugality, but the fear is preventing people from taking advantage of the numerous opportunities that are available. Those of a certain age during an economic crisis are often scarred for life. They tend to be extremely conservative and very hesitant to re-employe their money. I wonder what it will take to shake the fear. I think education is certainly part of the answer, but fear is a spiritual force, and education alone may not get at the underlying feelings causing us to act irrationally. Thanks for such an insightful comment.
I have been frustrated when I think about the returns of the 'lost decade'. It is easy to think about what you haven't gained, but people also don't seem to remember that they (should) have been buying stock during those depressed prices too. That is also why you need to transition your money into things other than stocks as you get older and older. Gotta diversify so any one market variable doesn't wipe you out.
Love the layout!!!
Those are great point. I couldn't imagine being 100% in stocks again (an earlier experiment) regardless of the age. You are right there is lots of missed opportunity. People should have capitalized. Everything was on sale!!!
Thanks for the comment about the layout. I've been ready to change for a while but wanted to wait until I did the migration first.
Everything is cyclic and I'm sure in 30 years, we'll see another housing burst. We all gain experience every year and hopefully become a wiser investor as a result. I agree with Kris that we need to keep investing and dollar cost average into the market.
Agreed. It's easy to assume we're special. We are special, but so were the people 30 years ago, and so will be the people 30 years from now. With that in mind, why wouldn't you adopt a "timeless" strategy that works for all "special" people 🙂
There are great deal of opportunities for an individual investor. I use both fundamentals and charts to buy and sell stocks. I normally buy large cap stocks for 5-10% gain in 2-4 weeks. For last two years, my investments have returned over 30%. This is possible due to low cost to buy/sell stocks using discount brokers.
Shilpan, I didn't realize you were a trader. Imagine what long-term benefits those who invest like you will enjoy. I know every year won't yield double digit returns, but even half of what you have been receiving is a heck of a lot better than a 1.5% CD
I love the article! Especially the concluding thoughts! I could not have said it better myself given I majored in Finance and Real Estate, became a stockbroker, and now a real estate rental property investor with several rentals. I have seen the good, the bad, and the ugly of both sides.
It is absolutely the same dance with the players changing. If people take no risks, or allow the bad to scare them into not investing at all (adjusting to risk), then they will never become financially independent.
Thanks so much Taline!!! I'm always happy when my views are in sync with seasoned investors like Robert, Joe, and yourself 🙂 I agree with you, and unfortunately, I have seen the downside of playing it too safe too. People just don't realize what they are sacrificing for "safety" sake. Great comment. Thanks for sharing!!!
"Investments" that are truly safe are not investments. Different investments carry different rewards and returns. And to make it more complicated, over time these rewards and risks for the different investments are changing. What worked the last 3 decades may not work the coming decade..
Nowadays just having all your savings in a savings account may seem safe. But with interest rates on or below inflation, you actually pay for the "safety". You lose a little because you are afraid to lose more. It pays off to keep searching for an investing approach that fits your attitude to risks and desired rewards till you have found it. Otherwise you are definitely not safe.
Agreed. It is a moving target, which does increase the difficulty, as you indicated. It has been a recurring theme of the post and the comments that assuming saving is safe is actually somewhat dangerous and that we should all examine our risk tolerance to adapt an appropriate investing strategy, so I think we're on the same page.
With regards to savings, as part of an overall plan, and saving can provide stability and liquidity, but there are some tradeoffs that should be recognized too.
Others have said it better, but investments involve risk. The greatest danger is not risk itself. It is forgetting that risk is inherent in investments. If people expect a quick return with no risk, they will lose a great deal. I do believe that a discipline of investing that is automatic, only adjusted periodically (i.e. not daily), is the most prudent course for most people, but I am no expert.
Thad. I agree with you. Data repeatedly show that often we're our own worst enemies when it comes to investing, yet people continue to repeat the same mistakes. Great comment!
Great read! Excellent points about the lost decade and the talking heads limiting views. Totally agree. If you think you will fail, you will! Glad you turned it around during your pity party. You have become quite the motivational speaker!
Buck, you're a powerhouse motivator 🙂
Talking heads are just that. They get paid to provide an opinion that will either inspire, scare, entertain, etc. However, presumed authority doesn't mean you are always right or that you are explaining all circumstances. We're not generalities. We're individuals. Nuances matter. That's why I would rather get my info a different way.
I like the new theme Shawn.
I believe some of the traditionally safe investments, such as bonds and munis, aren't nearly as secure as investors think they are. Just look at what happened to holders of Greek bonds last week and imagine that happening in lots of countries. There are a lot of municipalities that are either bankrupt or an the verge of bankruptcy, because of mismangement and pension liabilities. Also, interest rates are going to have to come up at some point, which usually clobbers the market value of long-term bonds. None of this is good.
The stock market is no picnic, but at least the return seem to justfy the risk.
Somewhere up the comments, I agree with Dave. When talking about finances, there's always risk. But investing in your personal growth through books, seminars and other stuffs is definitely worth the time and money. An increase in your knowledge is an increase in your ability to earn more and invest more(with more risk of course).
[…] the piece, “Are There Any Safe Investments Left?” (which was the original inspiration for this post) Roshawn Watson makes several great […]
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