Risk Aversion, Complacency, Mutual Funds, and the Status Quo market.
There is no such thing as risk free. There is “low”, “moderate”and “high” risk. These are just based on our experience of what we have seen to be the case thus far. In this sense, if we continue to maintain the same risk scenarios they become outdated. This is the case RIGHT NOW such as the case of Indy Mac. Also, what seemed to be such a guarantee is now up to question with Fannie Mae and Freddie Mac. Risk aversion is a different ball game now. Risk can never totally be averted, just hypothesized at aversion. We can get close to guessing at risk free but we will never achieve that. There are no guarantees. The sun has risen and set for as long as we know and will know, but it won’t in a few billion years.
Also a drastic change, which no one seems to think is so drastic: The North Pole is completely melting this summer. What the hell is going on in the world? The north pole will probably be water this summer, the payoffs that used to be guaranteed no longer are, and yet by striving to maintain the same definitions of risk averse we inevitably set ourselves up for high risk situations.
Putting money in a fixed interest savings account or a certificate of deposit or a treasury bond would seem to be the lowest risk investments one could make. These have intrinsic risks though. If they don’t succeed the rate of inflation, you actually lose money by letting them sit in these accounts, and lose the opportunity that could have been made by the use of them. These accounts may be insured by the FDIC or by the government, but these aren’t infallible either. What will happen when the government, who is already trillions in debt, tries to bail out Fannie Mae and Freddie Mac? This is going to get really interesting really fast.
Mutual funds were the “risk averse” method as of the last decade, and with the market having gone to hell, this option as being non risk averse has become very clear also. I’m not just saying this because of the recent decline in the market. I have been saying this for the last few years, that the financial advisers who say that on a “30 year average” the Dow Jones Index always wins have become complacent to the fact that the data they speak of really only goes back 40 years and this isn’t much to go off of when speaking in “30 year averages”. I never trust these guys, because saving a million dollars 30 years from now might not even buy me groceries. (Obviously if the money was invested correctly, it would go up with the market, but either way it still doesn’t make sense in the way that they make it out to).
I’m not saying there isn’t money to be had in the market. But it isn’t just in buying something and holding it forever anymore. It is more about riding the waves and taking advantage of all of the options. Short selling and day trading will become much more advantageous now that the market has become so volatile, and headed downward. I’m not even sure trading houses will be so liberal with short sales as they have been.
The new definition of risk averse has more to do with action, rather than inaction. Inaction is putting money in a fund or set of stocks and letting it sit. Action is taking advantage of the above mentioned traditionally higher risk options, which become lower risk in a market such as we have now. Also, with the interest rates as low as they are and the market acting the way it is, it only makes sense that right now is not the time to invest in the traditional “low risk” avenues, but with venture capital investments which capitalize on the concept that it is more financially advantageous to spend in a market such as our current market than it is to save. Whether this be by buying a business, or by investing in the equity of a business.
Also, one should consider “diversification”, not in the traditional sense of the word, by just buying multiple stocks, but in the sense of the capital you are investing. Lets take $100 million of capital for example. If you invested this four ways, $25 million each into venture capital, equities, foreign currencies, and commodities (gold is the standard). With the venture capital and equities one might even want to consider having these split amongst different countries. Obviously in the case of a global collapse all of these tactics are still subject to lose, but then again, who wouldn’t? Either way there is no “risk free”.
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