Risk and leverage are two extremely important concepts. Most investors have little financial education, so anything they invest in is not thought out analytically. They don’t know how to evaluate markets and market cycles, read charts, or know how or when to buy stocks, bonds, precious metals, or real estate at the best prices and at the best times. They end up taking risks without knowing the outcome.
Let’s start by learning more about the two main risks that affect investors – economic risk and opportunity cost.
Economic risk is the risk of losing money in your investment. The risk could be from numerous factors: you were unaware of some aspect of the investment that was negative or dangerous, you didn’t do your due diligence, or the overall economic conditions turned against your investment.
Some risks you have no control over – like changes in the economy or business that result in a stock market crash, real estate meltdown, or a global financial crisis. Your only recourse is to educate yourself so you are aware of changes in the economy that could adversely affect your investments.
But more often than not, the risk comes from the investor who is not educated and therefore not prepared. He makes a poor investment because he didn’t do his homework and didn’t know what he was doing.
Without financial education, all investments are risky. An uneducated investor can turn a fantastic income-producing apartment building into a foreclosure. An uneducated investor usually buys a stock somewhere near the top, and ends up selling near the bottom at a loss. An uneducated investor purchases bonds just before interest rates rise, leading to an immediate loss in principal.
Risk is certain. Reward is not. Financial and investing education reduces risk dramatically!
Opportunity cost is another risk. This simply means that if you put your money in any particular investment, you no longer have that money available for another investment that may have a better return. You lose the opportunity to invest in something better that may come up.
It used to be that you could look at the potential return of an investment relative to what you could get without any risk in a U.S. Treasury bill, CD, or money market fund.
These days the returns from these risk-free products are less than one percent, which is virtually no return for your money invested. So this measure is no longer really applicable today.
A better yardstick could be the return you can get from rental real estate, dividend-paying stocks, or tax liens. Though there is more risk in these investments, there is a much greater return.
And finally, any discussion of risk needs to talk about the use of leverage.
Leverage is a great tool, but it is really a double-edged sword. It can cut both ways. It can greatly enhance your financial results or destroy them quickly. Thinking of leverage like a sword reminds me that it is a tool and a weapon; it can help me as well as be used against me.
Leverage allows you to make more money using other people’s resources. It’s quite difficult in our current society to become rich and be financially independent from our labor alone. There are only so many hours a day you can work; you are limited therefore in how much you can physically work. There is no leverage.
Instead, you can use the leverage of OPM (other people’s money) or OPT (other people’s time) to make yourself wealthy.
Leverage can also come from using our minds, our education, our contacts, and our opportunities.
Today, we have instant access to all the information we need to become successful investors. A lot of this information is free to use. Financial data, charts, facts, expert opinions – it is all available 24/7 at the click of a mouse or swipe of a finger.
Many people fail to use leverage because they feel it is too risky. But look at it this way; it is only risky if you don’t have the financial education to understand what you are doing. The poor and middle class use their physical labor to try to become rich. The wealthy use financial leverage and other people’s time, energy, and money to become rich.
The rich use debt – good debt – as leverage to become financially successful. The middle class use both good debt and bad debt, with good debt used less than bad debt. The poor use debt – bad debt – to put themselves in the situation of owing money to the rich.
To reduce risk, you must educate yourself on investing, personal finance, and wealth building. The difference between someone who drops out of high school and someone who graduates from college is usually about a million dollars over a person’s working lifetime. Education makes a big difference.
But even if you didn’t go to college, as long as you have the drive, determination, and curiosity to learn, you can eventually succeed financially. A formal eduction is not a requirement for financial success in the U.S.
Financial education will bring big rewards. There are certain times where there is very little risk in an investment, and almost 100% certainty that the investment will pay off. Finding those investments, and being able to take advantage of them, requires knowledge and preparation.
It is up to you to educate yourself so that you can take advantage of the fantastic investing opportunities available to you right now…
Will you be there making money with these opportunities?
… or will you be sitting there on the sidelines, afraid to take action, and then regretting it for years?
Now that you understand the system, it is up to you to decide where do you want to find yourself in the future… Do you want to be on the rich, middle-class, or poor side?
The choice is yours.
What are you going to do??
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Here is a summary of the 10 rules:
Make sure you use all of the 10 rules in your investments. They will help you:
As you consider any investment, be sure to refer back to this list to make sure you are not breaking any of the rules. People say that some rules are made to be broken, but if you break these rules you will almost always regret it!
Always respect risk and leverage. This is probably the biggest cause of pain in investing.
You will know when something you invest in or are looking to invest in is too risky. You will start losing sleep thinking and worrying about it. The sell to the sleeping point rule is one you should always heed. It is your own internal risk thermometer at work.
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If you want to continue your education and learn how to invest in all markets, please check out my complete Lifetime Investor course package. Youll learn how to invest in stocks, bonds, real estate, tax liens, and gold and silver. You’ll receive a complete education in all aspects of investing that will set you up for a lifetime of investing profits.
You can check it out here:
Lifetime Investor Investing Courses
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Michael Benghiat is a successful independent investor, investing coach, and the founder of Lifetime Investor.He started out in the music business as a composer for film and TV, and gradually grew his investment portfolio of stocks, bonds, real estate, tax liens, and gold and silver into a six-figure income. You can learn more about Michael here.
Capital Properties
Nice content and tips that every investor can follow through it.