It’s a beautiful sunny day early in February as I write this and my thoughts are of the coming Spring. In a recent post on social media someone posted “No Rain No Flowers” an obvious illustration of the fact that you can’t get to the good stuff in life if you don’t get through the bad.
As I thought about that I began thinking about the current investment markets and the relationship of risk to return. We all know the old saying “No Risk No Return” but many don’t fully understand why. Why must we have –and live through - the “Rain” in order to have the “Flowers”?
We all know that the federal government borrows money every day to keep things running. They pay interest on their borrowings to compensate us for the use of our money. This interest rate is called the “risk-free rate” as the federal government can’t technically default (not pay us back) because they have a printing press and can just print the money to pay us. Since there is minimal risk to this investment the rate of return is very low. So low in fact that after inflation and taxes you are just about at a zero return.
In order to earn a return above zero and thus create real wealth, we need to take on some additional risk. The added potential return is the compensation we receive to take on that added risk. Without being compensated for taking the added risk, no one would take the risk and thus free enterprise would cease to exist. There are almost an unlimited amount of investment opportunities – opportunities for you to fund the creation of an enterprise, of an idea, and the eventual employment of people and to see that idea potentially benefit humankind.
There seems also to be an unlimited number of risks involved in the deployment of those funds. Suffice it to say that with proper asset allocation (what you invest in), diversification (how many different things you invest in), and careful analysis and monitoring you can minimize many of those risks. But you can never eliminate the risk entirely. And you should not want to. For it is the risks we assume for which we over time are so richly compensated. For without the “Rain” we are not entitled to the “Flowers”. Now go out and dance in the “Rain” – and as always let us know if we can help you tend your garden.