Ostrich investing and High-risk Returns
If you want a high return you need to accept and have the appetite to stomach higher risk. Yet too many people still are swayed by tasty sounding returns and the belief they somehow bend the rules and are risk free
Article by Patrick Latchford, CEO Blackwell Global Investments UK
In my last article I pleaded for a lunch date with anyone that could share with me the secrets of making money “like the George’s” (that’s Clooney or Soros) but sadly it’s been nothing but sandwiches since then.
Ignorance is bliss
Which, of course, isn’t surprising because the reality is that investing/trading/speculating is a simple game of risk, something most investors either wilfully ignore or remain blissfully ignorant; I suspect it’s a bit of both.
Looking in today’s papers about the collapsed London Capital & Finance investment firm, it’s clear enough that FCA regulation and the promise of a bond yield of ‘as much as 8 per cent’ was enough to get 11,500 investors to part with £237 million. Wow.
Who knows what happened in relation to the collapse, no doubt we’ll find out in due course, but what I always find surprising is that investors think that something offering an 8 per cent return is as safe as putting their money in the bank.
More return, more risk
There’s a very simple rule of thumb, if you are being offered a high rate of return, and let’s face it 8 per cent is huge in real terms, there must be a higher level of risk. Why? Because in order to get the rate for the investor the money has to be used for an investment like property development, trading the markets, or corporate lending or SOMETHING… Whatever the case may be, there’s a risk. It’s not like a bond issuer is just putting the money on deposit at the end of the day.
Eggs in one basket
Which is another the other thing, why do people insist on putting ‘all their life savings’ in one place, effectively a self-imposed form of increasing risk? I was speaking to an introducer yesterday and he was telling me that he advised his clients to spread their risk across 10 different brokers, and that’s before we even talk about the further diversification across different assets.
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Common sense and taking responsibility
The reason why the Georges’ make money – or at least partially – is that they know what they are getting into, can afford to lose the lot in any individual investment, and they can make a bucket load more cash if things go seriously wrong. Whilst we hear about the big wins, and here’s where I’m going to offer you a ‘guarantee’, I bet (not all of my money but some) they’ve had some real stinkers. Stinkers were the wheels have completely fallen off….all the money gone.
What to do?
So on a strictly non-advisory basis ( I don’t have the licences for advice), ‘man up’ everyone ( in a strictly gender neutral way ), open your eyes and accept that promised rates of return over the bank deposit rate means there is an element of risk. How much? Well that’s probably for another article on another day, but if you can get 2 per cent at the bank and someone offers you 10 per cent, I’d say for a 5x return you are taking 5x the risk. Reality is that’s probably a bit aggressive, but it should give you pause for thought.
Obviously lunch is available, at my expense, if my guest can enlighten me on high return opportunities with no risk, and if the business plan makes sense then I’m prepared to put my life savings into it…….