In the investment industry, “certainty” is typically defined in terms of a specific guaranteed return. For instance, savings accounts and US Treasury Bills offer certain (but low) returns. T-Bills are finally paying some interest now, a whopping .98% annually. Call it one percent, or $10,000 dollars on $1 million, essentially risk-free. That’s the textbook definition of certainty, but when we talk to investors, their definitions of certainty are rarely so narrow and clinical. What else does certainty mean and how can you achieve it?
Certainty is a personal matter
If you ask 10 investors what financial certainty means to them, you’ll get 10 different answers. What the answers will have in common is that they are all personal to the individual — about family, retirement goals or peace of mind, not about risk-free investment returns. On a personal level, investors want to be certain they never run out of money; certain that they can help loved ones; certain they can leave a positive legacy; certain they can sleep well at night.
Ironically, putting too much of your money into T-Bills and their certain returns can produce results that don’t even keep up with inflation. In that way, too much return certainty can be very expensive, even financially dangerous, causing you to be way off your risk balance and fall short of your goals.
Here are several approaches that may help you reach your own definition of certainty
1. Habit is powerful
Habitually investing your extra money is a sure-thing way to increase your wealth over the long term. I am talking about consistent periodic contributions to a rainy day fund or retirement accounts. By contributing every month for years on end, you not only put away a lot of money, you’re assured to be buying securities at all price levels, evening out your long-term returns. Habitual contributions to your IRA, Roth, 401k or SEP IRA help bring all your goals closer into reach. You may start at the $5500 regular saving and investment level. Over time you might go all the way up a $250k annual private pension investment. Whatever the dollar amounts, habit brings greater certainty of success.
2. Invest in facts
Some investing relies on faith, such as faith that companies like Apple, Amazon and Alphabet can keep on generating growth and ever higher stock prices. Other investments are anchored in facts. I mentioned T-Bills and their guaranteed interest payments. Those are facts. Dividend income is another fact, producing reliable, spendable (or re-investable) cash flow. To do this, look for ETFs of companies that consistently pay dividends. Instead of chasing speculative growth stories, trust and verify the cash flow instead.
3. Swim against the tide, sail into the wind
This one is easily accomplished with a technique almost everyone practices. Diversification. Diversification helps you generate positive long-term investment results by keeping you invested in a variety of assets, including those that are unpopular (gold, right now) and unpredictable (long-term bonds and interest rates). Diversifying requires that you buy a little bit of everything, including out-of-favor investments that often turn out to be quite cheap in hindsight.
4. Hand certainty off to someone else
Investment advisors can help you select “certain” investments for your portfolio, like risk-free T-Bills. These pros can also help you think about what certainty means to you, and translate that into an investment strategy that balances risk and return. With a registered investment advisor you can hand off the certainty question completely so you can enjoy your active life with your active family.
At Osbon Capital, we ask “What does certainty mean to you?” very early in the investment journey. Think about your answer and consider whether your current portfolio delivers what you are looking for.
John Osbon – firstname.lastname@example.org
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