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.
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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Do You Have the Courage to Become Wealthy?