In last weekend's article, I suggested that a potential strategy might be to capture 8% or 10% income and that a given investor might be willing to exchange that regular income for potential capital appreciation and that as long as he was getting his 8% or 10% it might not matter what gyrations the underlying investment might undergo. That was not meant as a recommendation, only as a method someone whose priority was income might undertake.
An anonymous writer on the blog challenged the theory saying that he/she would be happy with the return, but wanted safety. I would suspect that safety is something that many would like, but my question to the writer was how he defines safety. The term is amorphous; it is relative, and it is not particularly helpful without greater definition. What I might consider safe another might consider to be somewhat risky or vice versa. Let me say that the markets are not safe. There is risk in every investment. There were certainly times when people believed that companies like Bear Stearns or General Motors or Enron were "safe" investments. As it turned out, they weren't.
Highly rated bonds were often considered safe, but we have seen that it "ain't necessarily so." Safety in life, I believe is an illusion. Is it safe to walk down a set of steps? I had a friend in her 40's who died in a fall down the stairs. How about taking a walk? People fall, get hit by lightening, run over by cars, etc., etc.
Complete safety is unlikely. I have found that trading safety in my world is best established by exit strategy. Like most safety it is imperfect, but it has worked well for me over time. Other safety strategies may involve buying puts or creating hedges. However, it seems to me that ultimately the trader must begin with his or her own definition of what constitutes adequate safety for him or them. That understanding is one of the elements necessary to address as the trader formulates a personal plan as I have often mentioned in these articles and treated in detail in my book "Trade Your Way to Wealth."
Some time back I wrote an article on understanding oneself. I believe that self-analysis must be the starting point for any successful trader. He must understand his personal risk tolerance, what he demands in terms of relative safety, what he is endeavoring to accomplish with specificity, and the strategies and tactics he intends to employ. It is simply inadequate and superficial to say he wants a "safe" investment without understanding what "safe" means to him.
by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved
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