The Investment “Holy Grail” Doesn’t Exist

Authorized by Lance Roberts via realinvestmentadvice.com,

When it comes to the financial markets, investors have a litany of investment vehicles to choose from. The choices are nearly unlimited, from brokered certificates of deposit to complex derivative instruments. Of course, investment vehicles’ proliferation comes from investors’ request for everything from excess benchmark returns to income generation to downside protection.

Of course, all investor wants “all the upside, with no of the downside.” While there are vehicles, like indexed annuities, that can supply no downside risk, they cap the upside return. If you buy an index fund, you can get “all the upside” and “all the risk.”

However, an email from a reader last week got me reasoning about the perfect “investment vehicle” and the search for the “holy grail” of investing.

“My wife and I are looking for a place to position any of our ’emergency funds’ for a better return. Our requirements are beautiful simplistic:

• Guarantee at least a 4% rate of return.
• Allow me to retreat cash without penetration erstwhile needed.
• Reinvest all income
• If Bond yields decline as expected, the value of the investment increases.

At this point, I was assured in just suggesting purchasing a 10-year Treasury bond. At current rates, the investment would be green large than 4% and warrant the principal. If yields decline, the Bond Rises in price, reinvestment of invest is an option, and the investment is highly liquid.

Theoretically, this would be the “perfect investment” Vehicle for their needs. I said “theoretically” due to the fact that they added 1 more request just as I was about to halt off my conventional idea.

“Oh, and 1 more thing, the dollar value of the account must reconstruct table at all times.”

And that, as they say, rapidly ended the “perfect investment” Vehicle for their needs.

Why did the addition of “price stability” Make their request impossible?

The 3-Components Of All Investments

In portfolio management, you can ONLY have 2 of 3 components of any investment or asset class:

• Safety – The return of chief without failure due to price change or fees
• Liquidity – Immediately accepted without penetrations or feeds
• Return – Appreciation in the price of the investment

The table below is the matrix of your options.

The takeaway is that cash is the only asset class that provides safe and liquidity. Safety comes at the cost of return. Equities are liquid and supply returns but can propose a crucial fates of principal. Bonds can offer returns through income and safety if sheld to maturity. But in exchange for that safety, investors must forego liquidity.

In another words, no investment can supply all 3 factors simultaneously. While the table above uses only Equity, Bonds, and Cash, these 3 factors apply to any investment vehicle you may host.

• Fixed Annuities (Indexed) – safety and return, no liquidity.
• Certificates of Deposit – safe and return, no liquidity.
• ETFs — Liquidity and return, no safety.
• Mutual Funds – Liquidity and return, no safety.
• Real Estate – safety and return, no liquidity.
• Traded Reits – liquidity and return, no safety.
• Commodities – liquidity and return, no safety.
• Gold – liquidity and return, no safety.

You get the idea.

Let’s review our email question.

While I initially focused on the cash requirements, these were besides funds set side for an “Emergency.” In another words, these funds must be readily available erstwhile an unexpected event arrivals. Since “unexpected events” tend to happen at the worst possible time, these funds should never be put at risk. The needed for “safety” and “liquidity” eliminates the 3rd factor: Return.

No substance what investment vehicle you choose, you can only have 2 of the 3 components. Such is an essential and frequently overlooked settlement erstwhile determining portfolio construction and allocation.

8-Reasons To Focus On Liquidity

Liquidity is the most essential origin in making any investment. Without liquidity, I can not invest. Therefore, liquidity should always reconstruct a advanced precedence erstwhile managing your portfolio.

I learned a long time ago that while a “rising tie lifts all boats,” everually, the “tide recedes.” Over the years, I made a consecutive forward adjustment to my portfolio management, which has served me well. When risks begin to outweigh the possible for reward, And rise cash.

The large thing about holding extra cash is that if I’m wrong, I simply make the right adjustments to increase the hazard in my portfolios. However, if I am right, I defend investment capital from demolition and spend far little time ‘getting back to even.’ Despite media commentary to the contrary, accounting losses is not an investment strategy.

Here are 8-reasons why you should focus on liquidity first:

1) We are speculators, not investors. We buy pieces of paper at 1 price with hops of selling at a higher price. Dry is specification in its purest forms. erstwhile hazard outweighs rewards, cash is simply a good option.

2) 80% of stocks decision in the direction of the market. If the marketplace is falling, reputationless of the fundamentals, the majority of stocks will decline also.

3) The best traders realize the value of cash. From Jesse Livermore to Gerald Loeb, each believed in “buying low and selling high.” If you “sell high,” you have raised cash to “buy low.”

4) about 90% of what we think about investing is crow. 2 50% declines since 2000 should have rough us to respect investment risks.

5) 80% of individual traders lose money over ANY 10-year period. Why? Investor Psychology, Emotional Biases, deficiency of Capital, etc. Related studies by Dalbar prove this.

6) Raising cash is frequently a better hedge than shorting. While shorting the market, or a position, to hedge hazard in a portfolio is reliable, it besides simply transfers the “risk of being wrong” from 1 side of the ledger to the other. Cash protects capital and eliminates risk.

7) You can’t “buy low” if you don’t have anything to “buy with.” While the media breeds individuals for holding cash, it should be somewhat experienced that without cash you can’t take advantage of opportunities.

8) Cash protections against forced liquidations. 1 of the biggest problems for Americans is simply a catch of cash to meet members. Having a cash cushion allows for handling life’s “curve-balls,” without being forced to liquidate retention plans.Layoffs, employment changes, etc. are economically driven and trend to happen with downturns that coincide with marketplace losses. Having cash allows you to weather the storms.

Importantly, I want to stress that I am not talking about being 100% in cash.

I propose that holding higher cash levels during periods of uncertainty provides both stableness and opportunity.

With the political, fundamental, and economical backdrop becoming much more hostile toward investors in the mediate term, knowing the value of cash as a “hedge” Against destiny becomes much more critical.

Chasing young at any cost has typically not ended well for the bridge.

Of course, since Wall Street does not make fees on investors holding cash, possibly there is another reason they are so adamant that you regain invested all the time.

Lance Roberts is simply a Chief Portfolio Strategic/Economic for RIA Advisors. He is besides the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, LinkedIn and YouTube