What Is Safety in Investments?

Safety continues to be the word of the day. Investors continue to say what if? What if the stock market goes down? How will I live? What will I do?

Lehman Brothers Rockefeller centre
Lehman Brothers Rockefeller centre (Photo credit: Wikipedia)

This is not the first time I have discussed this and it will not be the last. We are emotional beings and are affected by what we hear in the media both financial and political. Therefore this will be a hot topic for some time to come.

Can you really find safety in investments? Remember even insurance companies cannot say guaranteed but rather backed by the insurance company. What does this mean? It means if the insurance company goes out of business you lose. Since 2008 there has been at least twenty life insurance companies that have gone out of business.

What would happen if the stock market went down and stayed down? No one can tell you for certain.

  • Would more insurance companies go bankrupt?
  • Would more banks go bankrupt?
  • Would the entire financial system collapse?
  • What would happen to the value of real estate?

There are predictions that these things can happen. In nearly all  cases these predictions are a marketing gimmick to sell books or the latest hot investment.

It wasn’t that long ago that if I had told you that GM or Lehman Brothers or Bear Sterns or Worldcom or ……..would go bankrupt you would have told me that it was impossible. All these things happened and yet the free markets continue to work.

In my opinion over the long term equities are the greatest wealth creating tool on the planet. It doesn’t matter if our currency is based on gold or platinum or silver or shark teeth people will need goods and services. These goods and services are provided by companies.

Because the equity markets are random and unpredictable.

It is unlikely if not impossible that anyone can tell you which specific investments will outperform with any consistency.

Again as I have said in the past your real risk going forward is inflation or loss of purchasing power. For a retiree this is a real concern. The Wall Street bullies may promise you an insurance policy which will be adjusted for inflation. What they neglect to tell you is that the inflation adjustment excludes food and fuel and soon health care. Now what are a retirees top expenditures in most cases? The answer I’m guessing here is food, fuel and health care.

The 2008 crisis has made many baby boomers make the switch from 100% equities to 100% fixed income. This is a typical reaction or should I say over reaction.

The answer, in my opinion, is somewhere in between. With the help of an investor coach you can determine the right mix of asset classes for you. Remember investing is not a game as the Wall Street bullies would hope you believe.

There are even insurance strategies which will avoid taxes. This sounds appealing to many investors unless you look at the details. If you consider the additional fees these strategies include your total returns will be lower and over time much lower.

The question you need to ask is do you want to pay the insurance company or the IRS? This assumes that the tax code does not change for insurance proceeds.  If the government decides to change how insurance proceeds are taxed you could lose twice.

Given this knowledge there are three simple rules of investing:

  • Own equities and fixed income.
  • Globally diversify.
  • Rebalance.

Your investor coach can help build the right portfolio for you and help keep you disciplined to your plan.

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