Don’t chase waterfalls with your money

I am usually surprised by how much people are willing to throw at get-rich schemes that can be debunked by a search in an internet engine. As I explained in my post on the B&FT, the main purpose of investing for retail investors is to achieve a level of financial comfort over the long-term, not to earn astronomical returns from some super investment that no one has heard of.

Unfortunately there are too many people out there just dying to sell you some complex, arcane investment which guarantees exceptional returns. Sometimes people do not like to be told to buy treasury bills or mutual funds because that is common knowledge and they want to believe there is a secret to obscene wealth that regular human beings just don’t get. This kind of thinking is likely to get people very rich, however, it is the people selling this super investment that get rich not those who put their faith and money in them.

I am not suggesting that one should not take risks with money. What I am saying is that the average retail investor simply does not have the risk appetite of large institutional investors investing other people’s money or high net worth individuals who can afford to seek higher returns because they can afford to lose big. The very first objective for the average retail investor should be to protect the hard-earned money (and its purchasing power) before thinking of ways to grow it.

What about the rule of “the higher the risk the higher the returns”? Well, the rule is that returns with higher risks ought to return higher returns not that they necessarily do. Many people who claim they are willing to accept higher risk actually are unable to accept loss. Unfortunately for risky investments that may pay off someday you have to be willing to accept seeing the value of your investment sinking to very low values before it will soar (if you are that lucky).

Everyone should be willing to take some risk to make money. But risky investments should be made with money you can afford to lose. Alternatively if you must invest in something risky let it be something you understand or are willing to understand. The old and boring advice about working hard, saving and investing in low risk securities like treasury bills may not be exciting but TLC warned us about chasing waterfalls instead of the rivers and the lakes we’re used to.

PS: If you don’t understand the TLC reference or don’t even know who they are, enjoy this classic.

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Jerome Kuseh

Accountant | Economist-in-Training | Private Investor
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