The Issue of Safety
Last weekend I wrote a little about what I consider to be the
importance of establishing streams of income. I included the
statement: "I believe that creation of diverse streams of income can
be a critical element in assuring financial comfort." One anonymous
blogger apparently mentally added the word "safe" to my statement when
he (or she?) wrote: "Safe income streams that should be part of every
ones portfolio has now become a myth exactly like the buy and hold
strategy. That strategy has really been a myth for as long as I can
remember. Not even the safest of all investments, Money Market funds,
are immune to loss."
No one, least of all I, suggested that any specific income
stream was completely safe. In fact, as far as I can tell, nothing in
this world is safe. Breathing can be dangerous depending upon what is
in the air we breathe; looking both ways when we cross the street
doesn't absolutely insure that we won't get run over; putting helmets
on our kids when they are engaging in activities may reduce the
likelihood, but it doesn't prevent head injuries. Risk is everywhere
and it is certainly present in trading and investing. I wrote "Trade Your Way to Wealth," in part, at least to show readers where the risk
is and ways to reduce or manage risk in their investments.
In my new book, "Smart Investors Money Machine," I demonstrate a
wide variety of ways we can create streams of income, but I also try
to discuss risks associated with each strategy. In my view, one of
the important ingredients in successful investing is knowledge of and
management of risk. If the anonymous blogger was under the impression
that I think simple diversification makes for safety, I failed to make
myself clear. Diverse streams of income, like the helmet on a child,
may reduce risk, but they do not remove it. Nothing removes all risk.
Recently a neighbor asked for some coaching as he was
re-entering the investment world. He told me he wanted something safe
with a very high income flow. I said I thought that is probably what
everyone wants, but the combination is very difficult, if not
impossible, to find. As a generality, the higher the potential reward
the higher the potential risk and vice versa. Only by gaining
knowledge can we make decisions and implement plans that help us
manage the risk no matter what we are doing.
Good Trading!
Bill Kraft
March 28, 2009
Copyright 2009, Makin' Hay, Inc., All Rights Reserved
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