No company or investor is in business to lose money. Your natural inclination is always going to be to minimize risk. At the very least, you want to limit your risk to calculated risk and keep your investment diversified.
What is Calculated Risk?
Diversity is good; calculated risk is where I have a problem. My question is: Who does the calculation? How do you calculate the risk levels? For example, if you wanted to invest in the stock market, how do you calculate the risk of a stock going up or down? You can’t. In all honesty, you have no control over the stock market. None, whatsoever. That is why most people rely on so-called experts to help them pick the stocks that may or may not help preserve their hard-earned dollars.
Don’t get me wrong. Stocks perform quite well as a long-term investment vehicle. If you’ve got 30 years to see your return, go for it. Typically, stocks outperform real estate over the long-term until you consider things like dividend versus rental income or the exponential growth of your investment when you reinvest profits instead of spend them. Real estate, unlike stocks, are based on the principle of Guaranteed Risk. That means as an investor, you know going in the return you can expect to earn on your money.
what is guaranteed risk?
Guaranteed risk is knowing up front the return you can expect to earn on your money at the time you make the investment. This is the reason real estate is such a phenomenal investment for those who are willing to take the time to learn the process.
Real estate is one of the few investments where you have complete control of your investment.From the time you make the investment to the time you exit, you control everything. The same cannot be said of a stock investment, as you are subject to the whims of management and other insiders who use information and marketing muscle to move the price of stocks up or depress the price of your stock based on whether they want to profit by shorting the stock or profit by overbuying the stock to give the illusion of substantial activity. For a baby boomer who is retired or approaching retirement, the risk of over-protecting your nest egg could keep you in poverty for the rest of your life.
How to know if you’re over-protecting your investment
It is natural to want to protect your investment, but there is a fine line between protecting your investment and hindering your own progress. If you leave your money in the bank earning peanuts because you believe it is protected by the FDIC, you’re not really protecting your investment. You may be limiting your possibilities. The question you always want to ask when it comes to investing is “How can I get a protection similar to the FDIC by investing in a vehicle that is just as safe, but guaranteed to give me 10, 15, or 20 times the return on my money?”
That is where the magic of real estate comes in. You can create significant returns on just about any sized investment in a matter of weeks and months. In many cases, you can do it without using a dime of your own money.
Charles T. Munger, Vice Chairman of Berkshire Hathaway is Warren Buffet’s friend and trusted adviser. Munger had this to say about investing in a recent appearance in Los Angeles: “Investors can reach their fullest potential only by thinking for themselves. If you stay rational yourself, the stupidity of the world helps you.”
The point? Learn as much as you can and apply your own skill set to make use of your knowledge base.
Money has a nasty habit of making people overly emotional and few things have the ability to so readily trigger anxiety in hard-working people like the fear of going broke. So be thoughtful and deliberate with your money by learning how to invest. Learn everything you can about earning, managing and keeping money. Then make your decisions based on applied knowledge and not knee-jerk reactions. As Mr. Munger said, “Knowing the edge of your circle of competence is one of the most difficult things for a human being to do. Knowing what you don’t know is much more useful in life and business than being brilliant.”
Whether you invest in real estate, the stock market or both, it’s important to leverage what you do know and identify the areas in which you have a blind spot. That is your very best chance of making guaranteed and calculated investments that provide you with the greatest returns.