Do you want 20 per cent annual returns without risk?

Topic: optimal investing

Conclusion: to decide on how to invest, first you must ask “for what?”


Low risk, high return, please

I often get questions about what to invest in. What’s missing is “why?”, “for what?” and “at what potential cost?”. People want as high returns as possible, and preferably with high liquidity (the option to cash in at any point) and low risk of loss.

That’s not how investing works. Investing means taking risk and betting on an uncertain future. Anything that’s obvious and certain has already been bid up to a price promising zero returns. Actually these days, many investments that aren’t even perfectly certain promise negative returns — government bonds for example.

If you have nest egg of a year’s worth of income that you want to invest, you must first decide on at least two things:

  1. What you want to get out of the investment — becoming rich, getting a decent return to live off, or preserving your capital
  2. What you’re willing to risk for having a shot at that — risk having to start over from zero, risk getting a sub-par or zero return

My own portfolio consists of the following main 9 elements:

  1. Lemuria (physical gold, silver): insurance in case of a financial re-set
  2. Polskenet and Agerus, small private companies in mid and north Sweden: middle of the road value plays with reasonable growth, exposure to my homeland economy
  3. ESURF (electrical jet motor surfboards) : exposure to increasing demand for expensive toys, in effect a bet on continued growth and monetary madness
  4. Private loans and Lendify: interest income, a bet on the status quo with muted growth and low interest rates but not a depression
  5. Apartment (no mortgage): inflation hedge, safety — a place to stay
  6. Listed stocks and Svahn portfolio management: public equity risk, economic growth
  7. Creditsafe, Bofink: exposure to increasing focus on the credit economy
  8. Apstec: exposure to increased demand for safety from terrorism
  9. Fimbulvetr (private business, including two podcasts): staying agile and relevant, honing my future skills

All bases covered

It’s a mix of exposure to growth, inflation, deflation, monetary madness continuation, monetary re-set, debt management, terrorism and personal development. I think I’ve covered most outcomes, but I definitely have much more to gain from a strong economy than a weak. Sure, I would still welcome a stock market melt down, but I’m not so sure I would be able to profit that much from it since I would have too little liquid assets to put to use.

I’m not really geared for a stronger economy either — well, I’m not geared at all — but for me it’s much more important to preserve my capital (with some upside) than to multiply it. I have almost nothing to gain from doubling my net worth, whereas halving it or worse would put me at risk of not being and feeling rich anymore.


What’s your investment equation?

Who are you? What do you want? Why do you want it? What are you willing to risk to get it?

What are you not willing to risk?

Do you want to live comfortably? Do you want to be rich (and dont care if you become poor, as long as you’re not average)? Do you just want to fit in, actually be average? Is your focus on yourself and your family (absolute level) or on comparing and competing (relative riches), or on something else altogether (e.g., being admired for your investment performance)

Whether you should buy physical gold, government bonds, P2P lending like Lendify, public or private equity, gamble on derivatives with or without leverage, or focus on your own education, skills and business is a question of what the returns are for, when, and with what certainty. There is no such thing as an optimal investment or optimal investment strategy.

I can say this much though, most people should be invested in equites for the long run, while maintaining more or less liquid reserves (depending on where we are in the stock market cycle) in uncorrelated assets (such as commodities, currencies or precious metals), in order to take advantage of the quite regular large drawbacks that occur on the stock market.

Please note that right now (April 11, 2018) seems to be a very special period for both stocks and fixed income instruments like government bonds. Plainly stated: they are extremely expensive and due for severe pullbacks. That’s especially true for story stocks like Tesla (I’ll write about that one pretty soon) that is all but sure to fall by at least three quarters unless Musk pulls off something truly remarkable. Hope is not a strategy though. Remember that.


Now, today’s homework is to write down what you own and why.

Your second homework is to start taking responsibility for your future, by taking regular walks while listening to my podcast Future Skills. Start with the conversation with hedge fund billionaire Martin Sandquist (episode 3) or this one (episode 6) with futurologist and philosopher Alexander Bard.

 

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4 Comments

  1. But… but… everyone knows the stock market is guaranteed high return, no risk in the long run!

    Not all money is of equal utility – it seems in your case that unpredictable gains are of less significance than unpredictable losses, and I think this is true for most people. It’s similar to why we buy insurance, which financially is just gambling against the house. The net negative utility of an improbable catastrophic loss outweighs the negative utility of inevitable but tolerable payments, even though the latter will /probably/ comprise the larger sum. From the point of view of the insurer, however, the accounts of all clients average out and each dollar is of equal utility.

    I find it interesting that you still play the investment game, even though you clearly have no need to. I think you’re getting some utility out of the game itself, with or without winning. Also, I wouldn’t touch Tesla with a 6 kilovolt transmission line.

  2. Buy the haystack! Forget about the needles and be happy to own an even share of the world market.

  3. There is no risk in equities because they are underpinned by Central Banks (and will be forever). The only risks are: 1) higher inflation 2) a reset of the financial system 3) a move towards full-blown socialism/communism in the Western World as our disgruntled youth turn away from corporate cronyism (masquerading as capitalism).

    • Nevertheless, stock markets fell by 50% in 2001-2002, and 2007-2008. It will happen again (though, as you say, Buying Opportunity)

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