Hi, it’s AK of American Wealth Builders.
I’m going to talk today about the “R” word… RISK.
Before you think “boring!” and skip this message, please just pause for a moment…
- NO ONE else is talking about risk.
- Even our team was like, “won’t an email about risk scare people?”
- People hate reading about risk (you were going to delete this message, right?)
- Only our attorneys were like, “sure, talk about risk. That’s always a good idea.”
And when your attorneys are the ONLY people who are willing to talk about risk, well, you know it’s a dull topic right? LOL
But I have to talk about risk. Here’s why:
- At American Wealth Builders we are all about full transparency and honesty – we know that there isn’t an investment on the planet that doesn’t have risk.
- As I said, no one else is talking about risk so we think that puts us head-and-shoulders above the overly-hyped conversation about investing.
- You are a smart investor and you understand that risk exists… and chances are, you probably want to know more about risk (even if it is a dull topic).
So let’s start by talking about risk at the most fundamental level. And I promise to keep it informative… and even a little lighthearted.
First, all investments have risk. If you think there’s a risk-free investment, then please don’t invest because you’ve been fooled. There is NO risk free investments.
Yes, even our turnkey real estate has risk (more on this in a moment).
Second, not all risk is a bad thing. Some risks are bad, yes, but risk also helps create opportunities. Let me give you an example: if there were no risks then banks would lend money to anyone. Then anyone could buy a house, and then we’d never need rentals. And as a result – real estate investing would disappear.
And even among investors, if there was no risk to investing in real estate, more people would invest and then there’d be bidding wars for every single investment.
Third, there is more than one type of risk. In fact, there are many types of risk. Some risk can be addressed and some can’t.
- In stocks, for example, there’s the risk of being only invested in one company or one type of industry.
- There’s the risk that inflation will diminish the value of your money (which is a hidden risk that most people don’t realize, but it makes T-Bills and CDs extremely unattractive when you understand this risk).
- For stock investors there’s market risk, which is just the very risk of owning stocks (that’s a risk that most people discovered in 2007/2008 when the whole market crashed).
- Heck, there’s even the risk of living on planet earth – if we get hit by an asteroid and destroyed then your investments will be worth zero (although you might not care at that point).
As an investor, you need to know which risks are apparent for your type of investment.
Fourth, understand the difference between a paper asset and a hard asset. A paper asset is one where the value of the asset is represented on paper (or virtually, as is the case in our modern age). Compare this with hard assets, in which the value of the asset exists within the asset itself.
- Stocks are a paper asset because the value is represented on paper theoretically (you own a piece of the property but you don’t actually keep a brick from the building in your house).
- Real estate is a hard asset because the value actually exists in that property. Another hard asset is gold.
Often, paper assets are worth only what other people are willing to pay for them. Let’s say you buy a stock in XYZ company today for $100, and tomorrow the executive team drains the company’s bank accounts and disappears to a South American country with no extradition treaty… well you might find that people are now only willing to pay $.01 for that piece of paper. Stocks can go to zero… basically because people are no longer willing to pay anything for the company.
Hard assets, on the other hand, often have intrinsic value because they are hard assets. There’s a physical structure. Heck, worst case scenario: if no one is willing to pay for the house, even the land underneath has some intrinsic value.
Fifth, people have NO real understanding about risk. As I mentioned above, no one realizes the risk of inflation so they put their money into T-Bills thinking that those are safe… while their money vanishes without them realizing it.
People also tend to think that higher risk means higher reward but this is not always the case. I don’t believe it’s the case for stocks versus real estate, for example.
I believe stocks are riskier and provide less reward. In spite of this, more people invest in stocks because they think owning property is riskier.
I think the real reason people prefer the riskier stock market to the more predictable real estate market is because of understanding…
They confuse a lack of understanding with risk. They think they understand stocks and they think they don’t understand rental property, so they assume that stocks are less risky than rental property.
But is that true? There are far more risks associated with investing in stocks (such as market risk, industry risk, company risk, currency risk) than there are with real estate. Plus, real estate is a hard asset, so it retains its intrinsic value.
This is also ironic because investors have no control over their stock investment but they possess a lot of control over their real estate investment.
Are there risks associated with real estate? Sure there are. But when it comes to investing, I’d rather put my money into a hard asset that cash flows with fewer risks than a speculative investment over which I have no control.
Take the time to dig into risk – it’s not as boring as you might think. You’ll be surprised at what you learn and if you’re a stock market investor right now then it might completely change how you invest.