This question of investing and safety is one of the most asked financial questions today.
But this is actually an age old question and an equation in fact.
Risk vs. Reward
We want the most amount of reward with the least amount of risk.
We could define reward as what we might get for our money when we invest.
We could define risk as what we might lose from our money when we invest.
The problem is, in most cases, when we increase reward we get a directly correlated increase with risk.
More reward creates more risk.
Less reward creates less risk.
So how do we invest so we can be as profitable as possible and as safe as possible; getting the most reward with the least risk?
I’ve covered this before and I’ll cover it again. The word invest actually at its root means “to clothe your capital” (to putting clothing on your money). We are clothing our money with the things we invest in just like we would clothe ourselves.
I only wear clothing on myself (and on my money!) that meet the following criteria:
- I like it
- I understand it
- It fits me
- It fits the occasion I’ll use it for
- It’s vital/not a fad
- It’s not overpriced
If an article of clothing (asset) doesn’t meet all of these criteria, I’m not buying it.
In fact, if all of these criteria are met, I’ve increased the safety of my investment exponentially and I have reduced my risk and probably optimized my returns.
But there is 1 other major way that I make sure my investments are safe.
It is called Intrinsic Value.
There are technical definitions to this but I’m going to give you mine because it’s the most simple and easy to understand.
Obviously when we invest, if it goes well, we are getting a rate of return right? Which means a rate of return almost becomes a commodity and it is very easy to simply go around looking at charts and chasing the highest return.
So when I invest I ask myself, other than a rate of return, what am I getting?
Why? Because a rate of return isn’t guaranteed. So if I don’t get a rate of return, have I lost everything or do I still have something of value? If the answer is that I still have something of value even without a rate of return, that is Intrinsic Value. If I don’t, I have lesser or even no intrinsic value.
Here is an example of intrinsic value:
I buy a local business as an investment. That business has shown a strong profit and they also own lots of assets. They have a building, equipment, inventory, intellectual property, a list of clients, talented staff and systems and procedures in place for running the business. If I buy this business and it fails and is unprofitable, I don’t earn a return. But I still own the building, equipment, inventory, etc. I can keep these things and use them myself, I can sell them, or I can repurpose them to start another business. To a degree, I have some downside protection and my money is safe because I bought real assets that have Intrinsic Value.
Here is an example of no intrinsic value:
I invest in a new Crypto. It has only been around a few years, but in the time it has existed, it has earned triple digit returns. But it is not actually a currency and does not provide any real utility value other than the ability to be bought, sold and transferred. It doesn’t pay a yield and there are no underlying assets. If this new Crypto fails and is unprofitable, when do I have? I have nothing I can personally use, I have nothing I can really sell to someone else for them to use and I can’t repurpose it or use it for something else because it doesn’t do anything other than be bought, sold or transferred. I have no downside protection and my money is not safe because I bought virtual assets that have no intrinsic value. (Hint: if something is “virtually” an asset, that means it isn’t one. If I “virtually” bought a Ferrari it means I don’t actually own a Ferrari.)
This is the case for digital/virtual assets and also for many paper assets.
So how to I invest safely?
By investing for Intrinsic Value. By diversifying the value I receive out of just a Rate of Return and pegging it to real assets that I own and can use regardless of performance, I am getting something for my money no matter how the returns are. And if I check off all of the boxes for clothing my capital then the returns should be there too and then I get both!
So what are some examples of things that have Intrinsic Value?
- Real Estate
- Small businesses
- Transportation (cars and vehicles that can generate profits)
- Collateralized loans
The other thing I can focus on is investing in things that pay an income.
If an asset pays an income it means I don’t have to sell it to make money. I can just hold onto it and it will pay me. What does this mean? That to a degree, the price of it doesn’t matter because I have no plans to sell. So if the market for that asset “crashes” I don’t care because it pays me and I don’t intend to sell. You see, if an asset pays me no income, then it’s a very big deal if the market crashes because selling the asset is the only way I can make a profit as an investor. So if it crashes, I can’t sell it for as much money as before and therefore I make less profit or even no profit.
The idea that investing has to be risky is a myth. The truth is 90% of people don’t actually know how to invest. Many of them are actually speculating (gambling or betting) and think they’re investing.
Invest in what you like.
Invest in what you understand.
Invest in what fits you.
Invest in what fits the occasion you need it for.
Invest in things that are vital and not fads.
Invest in things that are not overpriced.
Invest in things that are real and have intrinsic value.
Invest in things that pay you an income.
If you do all of these things, you will ensure you invest and keep your money safe!
I hope this has been helpful for you and I am going to include a free course that I taught on my 6 favorite investments below!
I also teach a new online course on Finances every Friday night at 10:00 pm EST from my office in Tampa, FL. This week I am going to talk in detail about the safest ways to invest and how to keep our money safe when we do invest.
I want to invite you to register for that for free by clicking here!
Here is the free video on my 6 favorite investments:
To Purpose, Wealth & Freedom,
Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Yahoo Finance, Fox, Chicago Weekly News, New York Finance, interviewed on over 45 podcasts with world renowned experts, earning endorsements and affiliations throughout his career with names like Kevin O’Leary, Grant Cardone, Dave Ramsey, and Pamela Yellen.
Jerry’s mission in life is to help create millions of financially educated and solvent families achieving greater financial freedom and sharing the truth about money with those around them.
Learn more at www.WealthDynamX.com
(DISCLAIMER: The information in this content should not be considered tax, financial, investment, or any kind of professional advice. Only a professional diagnosis of your specific situation can determine which strategies are appropriate for your needs. Wealth DynamX can and does not provide advice unless/until engaged by you.)