High risk, high profit?
In the month of December, a very close friend of mine asked me for a session with his childhood friend who had just entered the insurance business. When I got there, the discussion had already started and my friend shared some of my financial strategies with his ‘financial planner’. The financial planner was totally against some of my strategies. Many different strategies were discussed, but today I will only share one. That’s HIGH RISK HIGH RETURN!
You see, I’ve been investing in a portfolio of direct investments. My personal portfolio consists of stocks and shares, physical precious metals, ETFs, real estate development shares, REITs, and a few leftover unit trusts that I still hold. However, I have sold a lot of mutual funds over time to diversify into all of the investments I just mentioned. He drew this graph and explained…
In his exact words, “In order for us to have a balanced portfolio, we must first have a balanced and structured portfolio. The fact of investing has always been HIGH RISK HIGH RETURN. Therefore, to start your investment journey, you should start with investing in endowment policies and policies linked to investments or mutual funds before investing in direct investments such as stocks, precious metals, real estate, etc.”
Guess what? My friend, who is totally ignorant about the world of finance, said, “Jonathan, what you said makes a lot of sense… All the financial experts say HIGH RISK, HIGH RETURN! You are investing mostly in direct investments! Your portfolios investment are too much. You should totally listen to this guy…”
I smiled and started a conversation.
Me: Dear friend, do you think your media business is risky?
Friend: Not really… I consider my risk to be minimal.
Me: Because? You are generating good returns from your business, aren’t you?
Friend: Yes, I have been generating good returns because I am in full control of my business and I know what I am doing.
Me: What if I put in the capital and you run my business in the financial industry? Do you think it would be risky for you?
Friend: Of course! I have no idea how you run your business!
Me: Well… Since you mentioned that your business is low risk, how about me running your business? Will it be risky for me?
Friend: Of course! You have no fucking idea how my business works!
Me: So that doesn’t make any sense to you anymore? We are both in businesses that are considered direct investments that are HIGH RISK HIGH RETURN. But why is your business giving you high returns but you don’t consider your business to be high risk?
Dear readers, by now I hope you have learned something here…
First, you don’t need high risk to generate high returns.
In fact, I consider my investments to be high risk when I don’t have the right knowledge when it comes to investing. When you know what you are doing with your money, you have effectively reduced your risk.
Second, I will never again put my money in investment-linked policies or mutual funds.
Because? Most ‘professional’ fund managers cannot beat the index in the long run and charge higher fees than ETFs. By investing in investment-linked policies or mutual funds, you are not making yourself rich, you are only making insurance agents or mutual fund agents rich.
Third, never listen to investment advice from insurance agents.
Insurance agents are trained to give insurance advice, not investment advice! The best thing an insurance agent can do for you is to sell you an endowment policy that is returning well below the rate of inflation. What is the use of tying up your money for 25 years and investing below inflation? The fact is this… If you listen to the advice of the poor, you are receiving bad advice. Smart insurance agents work with qualified investors to provide quality investment advice.