Check out my video on last weeks topic, Quantitative Easing - https://www.youtube.com/watch?v=Nvoyf9JE7X8 As we reach the letter R in the A to Z of investing, we come to perhaps the most subjective area in the investment universe. The one that only you can ultimately decide on . Because R is for Risk. The dictionary defines risk as exposure to harm, danger or loss. Every decision you make around money, investment, wealth creation and wealth protection involves risk. Let’s start with the mediocre majority’s strategy for getting rich. The national lottery. Under the old rules, the odds of winning the jackpot were about fourteen million to one. Obviously much too generous, because they’ve just changed the rules! Your chances of matching all six numbers are now forty five million to one! And yet you see people in WH Smith buying ten or twenty tickets at a time. People to whom that’s a significant chunk of their disposable income. At least the lottery is a clear, definable risk. In most cases you make a small investment, you have a brief high on Saturday night and then you lose a hundred per cent of your investment. There are many risks that are less obvious and much more dangerous. Cash in the bank for example. Every week I meet intelligent, successful people who confess to having hundreds of thousands of pounds sitting in High Street bank accounts earning maybe nought point two five per cent a year in interest. Why? Because they think it’s the safest choice. When I show them how the purchasing power of that money has halved in a handful of years, even in this supposedly low inflation climate, they turn a whiter shade of pale. Perhaps the greatest risk of all for serious investors today is the impact of our previous episode on quantative easing. When combined with interest rates at four hundred year lows, this has distorted financial markets like a fairground hall of mirrors. QE has an impact so predictable you could set your watch by it. Stock markets go up, currency goes down. Case in point, Japan. But what happens when the QE stops? And how do you navigate your way round these manipulated markets to find value? How can you make a fair assessment of risk when all the fundamental ways of valuing stocks and bonds have been thrown out of the window? We now have the Financial Conduct Authority urging pension providers to focus on ‘safe’ assets such as government bonds. These are so overpriced that they want to take our capital, keep it for five or ten years, then give us back barely any more than we gave them in the first place! In other words, we take a risk for which there is no return. In fact it’s worse than that because of inflation and continuing decline in the purchasing power of money over that period. So effectively we are taking a guaranteed loss in what the regulator says are the safest assets of all! This kind of BS is why you must take control of your own financial future. You must not do what the majority do. You must seek the best independent information you can find and draw your own conclusions. Here’s what I do and recommend. Think of your portfolio as a pyramid with multiple levels. At the bottom of the pyramid are low risk, low return investments like savings accounts and government bonds. I also include gold at this level as my insurance policy against a total collapse of the currency markets. Above that layer might be property investment, especially commercial property throwing off higher yields like the dementia care homes you’ve heard me say so much about. Up another layer and you should own some stocks and shares from all over the world. At present I’m increasing exposure to Japan and Europe and decreasing my weighting in Europe and the US. Up another layer and I’m into higher risk higher return bonds and loan notes giving ten per cent plyus returns with decent security underlying them. Then, at the top of the pyramid are speculations. Taking a punt with a small amount I can afford to lose in the hope of a big return. At the moment this includes speculation on the silver price, foreign exchange trading and investments in privately held early stage companies. If you combine this layered, pyramid approach with the broad diversity recommended by Andrew Craig in his How To Own The World book, you’ll be doing the best you reasonably can to put the risks in your favour. But remember, everybody’s view of risk is different. Never invest in something that’s going to keep you awake at night, no matter how good it seems or who is recommending it. First rule of investment? Know yourself! And that includes knowing your own attitude to the Big R – Risk.
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