Outsource Your Concentrated Risk To A Risk Bearer

By |2020-07-23T19:23:12+00:00July 23rd, 2020|Investing|

 

 

In the past year, coffee futures have dropped 18.35% in value; if you had based your financial future on coffee futures, your account could be worthless.  How about concentrating in a category that has risen?  Silver, for instance, has increased in value 25.57% in the past 12 months. The futures value of lumber has risen by 47.46% in the past 12 months, and it is based on supply and demand.

How about Amazon stock?  In the past five years, Amazon stock has increased from $400 a share to $1,600 a share.  In 5 years, an increase of 400%, would that be considered a concentrated asset? How do we know which category to choose and what to do to shelter our overall exposure to risk? How do we, as Baby Boomers, decide how much to invest and how to invest it?  Do we spread it out, or do we let our investments be concentrated?

The answer is simple if you can answer this question. What is the purpose of the money you want to invest, and how can it accomplish the goal?

If the funds are needed in 20-30 years, the answer will be far different than if the asset were planned for use in 5 years.  It is a simple exercise in risk tolerance and the planned need for the asset. If you do decide to “concentrate” your investment into one area, how do you even decide?  It takes research and knowledge to make any intelligent decisions.  The priority for any asset you are considering should be the basics of economics.

Does the asset provide

  1. Sustainable Economic Growth. There is a strong positive connection that can show sustained economic growth coupled with a robust security exchange controls leads to growth.
  2. Who is governing the asset? As an example, millions have invested in Bitcoin, but what exactly is Bitcoin, and who oversees it? Does the asset category have anyone regulating it?
  3. Corporate social responsibility. In other words, what is the purpose of the asset, and how does that asset fit into the economy? Then, of course, there is the question of who is buying and who is selling.
  4. Retail awareness. What good is the category if no one knows about it or even cares about it?

Once you have answered these four questions, then you can move on to a decision as to what category might be in your best interest.  But wait, there is one more question that needs to be asked.  What is the purpose of the asset category, and what do you want it to accomplish for you?

Answer that question, and you can slim down your choices to one last big question.  What is your potential gain and what is your exposure?

Exposure to risk is the exposure to loss.  Loss too big or too important for the individual to assume should pass the risk to a risk bearer.  A risk bearer is an insurance company.  All successful investors always know their downside and their risk tolerance; they always limit their risk exposure by re-insuring that exposure to a risk bearer.

Do you think that an investor who takes a significant position with an asset does so without the low side protection?  Of course not, the investor would never be successful without exposure protection. How does the average investor even begin to make a correct decision?  It always goes back to the reason for investing, what is the purpose of the investment, and what do you want it to accomplish.

Here is an example: The purpose is income, and the timeline is five years.  If that scenario was in play, what category should be selected?  Buy a product without risk!  The Time Horizon is far too short, and there is not enough time to manage a correction in a specific asset category. First, evaluate your assets and make certain they are aligned with their specific goals.  Once you have done that, then decide how you are going to manage your downside.  Are you going to take your chances, or are you going to pass the risk to a risk bearer?

When that decision is known and made, then it is a matter of specific knowledge about the category that interests you.

  • Corn futures
  • Coffee futures
  • Precious metals
  • Orange juice
  • T-Bonds
  • Many more choices

The list can cover almost any asset category available.  You can also invest without buying the asset category; as an example, you think gold will increase, so instead of buying hard metal gold, buy stock in a gold mine.  There are many ways to invest in the category that interests you.

The key, of course, is knowledge.

 

 

About the Author:

Bill Broich
Bill Broich is a well-known annuity expert with over 30 years of experience. He has written hundreds of articles on annuities and other financial topics, and has been a featured commentator on TV, Radio and the Internet.

Toll-Free: (360) 701-6209 | GVA, Annuity.com | Email: bbroich@msn.com