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The Price of "Safe"

The Price of "Safe"

| February 11, 2017

SAFE IS NOT ALWAYS SAFE.  What do I mean by that?  Safe is safe in the very short term, however, as time stretches on, safe becomes unsafe because of a couple of things, 1) inflation, and 2) opportunity cost.  

Let's start with opportunity cost.  This is simply the lost opportunity to have earned a higher rate of return than we would have if we played it "safe".  Example.  Joe wanted to play it safe and bought a one year CD that paid him .5%.  On a $10,000 investment, this would have been $50.  However, if he had placed the $10,000 in a diversified portfolio with a return of 10%, or $1,000, he would have gained $950 more than playing it safe.  In all fairness, he also could have lost 10% that year.  In any one year, there is more risk of loss if we invest in stocks, however, the longer that time stretches on, their is a smaller and smaller chance that an investor would lose anything because they've built up so much from their original investment.  Is safe safe in this scenario, NO!  The price of safe in this scenario is a loss.

Inflation.  Inflation is measured by a basket of goods and how the price of that basked changes year to year.  In the low interest rate environment that we've been in, earning .1% at the bank (to play it safe), inflation alone has been running at about 1-2% annually which is low by historical standards. However, all along one was losing money at the rate of .9-1.9% per year in this investment.  In other words, your investment has to produce a return of more than 1-2% to even break even or outperform.  So, the longer you have low interest rates but higher inflation, you are losing money even though you have not invested dime one into the stock market.  Is safe safe in this scenario, NO! The price of safe in this scenario is a loss.

Let's say that you did invest in the stock market and it went down buy 5-10% that year.  You are probably kicking yourself because you wanted to play it "safe".  However, if one stays with the plan and keeps the money invested, the longer it is invested, and especially after 10 years or longer, there is virtually no chance of someone losing their original investment.  In fact, they could have probably doubled their money in 10 years based on the "Rule of 72".  This a the formula that divides 72 by the rate of return to find out how long it would take to double your money.  If you are receiving a 7% return (72/7 = 10), it would take about 10 years for your money to double.  Is safe safe in this scenario, ALMOST CERTAINLY!  

Consider the parable of the king in the Christian bible (Matthew 25:13-30) that left three men in charge to invest his money for him while he was on an extended trip.  He gave one man 5 bags of gold, another man 2 bags of gold, and the final man 1 bag of gold.  The king went away for an extended period of time but when he returned, unannounced to the men he gave money to, he wanted an account of his money.  The many with 5 bags reported that he now had 10 bags, an increase of 5 bags of gold or a 100% increase.  The king commended him for it and put him in charge of more.  The man with 2 bags reported he now had 4 bags, an increase of 2 bags or a 100% increase.  The king commended him for it and put him in charge of more. The man with 1 bag put his in a hole in the ground instead of on deposit and told the king that he still only had 1 bag to return to him, no increase or a 0% increase. The king sharply rebuked him for his lack of judgement and for playing it safe and was called wicked and lazy and was stripped of what he had been entrusted with.  The moral of the story is that there is scarcity in playing it safe.  The story makes a strong hint that we need to put our money at risk over time so that we can have the potential to have more (much more) at a later time.  

Bottom line:  Do you want to play it "safe".  Depending on your time horizon for the money you want to invest, you may want to play it safe if you need the cash in 1-2 years for a major purchase and I would probably do the same.  However, if you need the money to provide an income later in your life for your retirement, there is no time to waste in playing it safe.  

Contact me if you would like my help in living out these principals in your life.  I look forward to hearing from you. 

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Snow Financial Group, LLC is not affiliated with Kestra IS or Kestra AS.