Saturday, March 28, 2009

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.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved


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18 comments:

Anonymous said...

look at AOD and IGD for high dividend yield with relative safety. dividends paid on a monthly basis. g luck.

Donato said...

Yes. I want what your neighbor wants . . .

Anonymous said...

Both AOD and IGD had huge volatility in 2008. AOD was $16 at April 2008 and is now at $6. They behaved like stocks. Check out FGMNX that pays 5%. Started at $11, down to $10.70 and now at $11.2.

0% under the mattress
2% treasury
5% bonds, FGMNX
7% preferred corporate bonds
10% junk bonds
15% stocks with 40% loss in 2008

Anonymous said...

Well said Mr. Kraft...

Too many people tend to repeat what they hear and the concept of safety is relative at best.

Recently, a radio show host glibly commented that if an investor wanted to be safe, all they had to do was put their money in an FDIC insured bank because "nobody has ever lost a penny in one".

My first thoughts on that comment were that earning 2% in CD in an environment of 5% inflation might not be critically defined as "investing"...and secondly,the talk show host failed to mention that the entire quote should have read "nobody has ever lost a penny of PRINCIPAL as long as they maintained an account less than the current insured limit of the FDIC."

(One can only wonder if funds in excess of the FDIC limits go to "money heaven" in the event of a collapse)

That same theme also does not address the question of whether interest would actually be paid in the event of a default nor does it describe the possibilities of time delay in getting that same principal (and perhaps accrued interest) returned and back in the hands of an investor should the bank be subsequently closed and turned over to another institution to operate.

Senecajim said...

I believe a faily low risk strategy is buying stock in low debt to debt free dividend paying companies and then writing covered calls deep in the money out into next year. Seems to work for me.

Anonymous said...

Paid off rental property is the safest form of income I know. It pretty much goes with the economy but people have to live somewhere. I receive about $25,000.00 a month from a total of $350,000.00 which is about an 85.72% return.
Big Spender

Anonymous said...

Over the years I myself found out that all investments bear some risk. US Treasury always seemed to be a safe place to keep some money, but they are boring and hardly pay anything right now. For the last ten years I have put quite a sum of money in Charitable Annuities with a verfy decent return and added tax benefits. This income gives me the needed security to stay in the market and hopefully with added funds will be apply to invest more aggressively with expert advise given.

Anonymous said...

Hello Bill Kraft.
I am an independent investor who likes to stay informed about the financial front.
In this wekends Barrons, there was an article about 'naked puts'.
I basically understand how they operate.
My question is how you feel about it going forward?
I believe that the congress should look at
reinstituting a form of 'glass-steigal'
and the uptick rule in some form.
Today, after all these years, readding these two as is may not work.
But, in an altered form, they can be positive, in my opinion.
I wonder how mch those in Congress understand this.
Thanks for reading,

Bill Kraft, MarketFN.com said...

Don't we all, Donato?
Bill Kraft

Bill Kraft, MarketFN.com said...

Say, Anonymous, that adds up to 39%, are you sure you don't have some under the mattress???
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks, Anonymous, for the cogent discussion of safety and the FDIC.
Bill Kraft

Bill Kraft, MarketFN.com said...

Interesting and looks like an intelligent strategy, Senecajim. Any exit strategy if the stock is heading the wrong way?
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks, Big Spender. Safer than many other things for sure.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks for writing, Anonymous. I write a little about annuities in "Smart Investors Money Machine." As you have found, some types of annuities under the right circumstances can be quite appealing.
Bill Kraft

leveragedlady said...

Dear Mr. Kraft: Do you feel it is prudent to have all of your investments in US Dollar denominated assets? Do you feel that part of your diversification should be in commodities, gold and silver, foreign stocks or foreign currencies? Thank you for your consideration. Sincerely, E. Stein

Bill Kraft, MarketFN.com said...

Thanks for writing, E Stein. The answer is different for everyone. I, for one, do not have any significant experience trading foreign currencies so I don't hold any though I do have a position in gold, for example. There is some appeal in the argument that commodities are always going to be around, but the individual who wants to own them needs to decide whether to hold the commodity or trade the futures or even the options on the futures. I do like overall diversification beyond simply owning different stocks. I believe the smart investor will look at various classes of assets including real estate, corporate bonds, government bonds, stock, options, commodities, currencies, etc. and decide based upon his or her experience, knowledge, risk tolerance, and capital what combination best fits their individual circumstances. As circumstances change, positions may be rebalanced.
Bill Kraft

Gemma Star said...

Years ago I heard a financial person say that most people seek three goals in seeking investment vehicles: 1) High returns; 2) Safety; 3) Liquidity.

Then he said: "At most, you can achieve two out of three of the goals but NEVER all three."

Those are words that I think one can take to the bank!

Bill Kraft, MarketFN.com said...

Certainly true in my experience, Gemma Star. That's a piece of wisdom we should all keep in mind.
Bill Kraft