The “Holy Grail” of investments would be one where you would get a high return, regardless of market/world conditions. this was tries years ago (Long term capital Management), wherein every investment with a positive Beta was paired with a investment with a negative beta-the idea being that each risk would be balanced by a countervailing risk, so that you would always make money. LTCM failed when its Russian bonds investments soured (the Russians defaulted). But, now that we have hundreds of derivative type investments, including puts, calls, warrants, etc., it seems that a highly sophisticated computer driven investment program should be able to identify and eliminate all risks-has this been done? Bernie Madoof claimed to have it-but he proved to be a crook.
So where can i put my nest egg, get >10%/year, with no risk?
I think you answered your own question.
I think the only real reward with no risk is a savings account (or other similar instrument). But if you want to do 40-100 times better than a savings account type interest rate with NO risk to your principal, you might have to find a nice ponzi scheme and try to get in and out really fast.
Puts, calls, and warrants have been around for hundreds of years. They aren’t new.
LTCM was not significantly different than its contemporaries. Hedge funds always use hedging strategies. That’s why they’re called hedge funds. LTCM’s particular strategy did not work very well in part due to their ridiculously high leverage ratios. Their downfall was actually precipitated by the Asian market crisis in 1997, but the Russian default was the nail in the coffin.
If someone invented zero-risk investing, everybody would put their money in it and those instruments would in turn rise in value to the point that their returns would be near zero. If you want an example, take a look at US Treasury securities. They’re not without risk (there’s always a small chance that society could collapse) but they are so low-risk that the returns don’t even keep up with inflation.
If you want reasonable long-term returns, put some money in a no-load index fund and keep it there for a few decades. Make regular contributions when able (dollar-cost averaging) and you may see annualized returns of around 10%. But every once in a while you may lose a bunch of value. That’s why target retirement funds shift their allocation from equities (somewhat volatile) to bonds (less volatile but lower returns) as their customers near retirement age. You don’t want to quit working during a market crash if your portfolio is all in stocks.
Investing doesn’t work like that. I think the thing is, if someone had an algorithm that someone could use to minimize risk to the point of never losing any money, the smart thing to do would be to use it to get preposterously rich pretty quickly. If someone used it as the basis for an investment advice company, they’d probably be telegraphing how the algorithm works by the mechanism of how much, when and what they buy in the investment markets.
And, I suspect if that was the case, someone would figure it out, and if everyone was using it, the market behavior would likely shift as a result such that the algorithm would no longer be effective.
I suspect what you’re getting at though, is whether or not someone’s written some software that can identify when a stock’s overheating and pull out/sell right at the best point before it loses value, etc… And the answer is no- as far as anyone knows, there’s no good way to conclusively identify that point in the moment. Investing and stock price behavior is kind of like a herd of cattle - they may be sitting still grazing, and then for some unknown reason, they stampede… and then they eventually stop. Some causes of stampedes may be predictable, but others may be totally dumb. And the behavior of the herd while stampeding isn’t rational either- they may go for miles until exhaustion, or they may just calm down of their own accord.
So trying to write software to predict this is probably about as difficult as trying to model investor behavior in aggregate. Not easy stuff, I’m sure.
If we stipulate that this magic 10% investment exists, and returns can’t go lower than 10% regardless of how many people put their money there, wouldn’t that just move inflation and other interest rates up such that it was pointless?
Because why would anybody sell bread unless the price of bread kept going up 10% every year? If bread wasn’t getting more expensive at a rate higher than the money tree was giving out, wouldn’t they just stop selling bread and buy shares in the money tree instead of flour?
Do US Savings Bonds count? Very low return, but so long as the country doesn’t collapse they’re good.
Some people might be interested in Simple Wealth, Inevitable Wealth by Nick Murray. I don’t agree with everything he says–he argues strongly that a traditional financial adviser is beneficial for most people.
What I do agree with (and what a lot of people may have trouble understanding) is that he turns the whole risk vs. safe paradigm on its head. He argues that over a sufficiently long time period – say 30-40 years – the stock market is actually the safest form of investing.
Why? (This is where it gets interesting.)
Because the stock market, above all other investments, is absolutely guaranteed to out-perform inflation.
In other words, the REAL risk of investing is the risk of not keeping up with inflation.
Savings Bonds and T-Bills have quite a bit of risk-of-inflation, you still get your $1000 back, but that $1000 doesn’t buy as much even with the interest you’ve earned. Granted, you’ll minimize your risk-of-default, however there’s more types of risk out there.
There is a concept in finance called the “risk-free rate”, which is the theoretical rate of growth of a risk-free investment, and that rate is not zero. In practice this rate is not achievable by any real investment, though.
Up until 2007-ish, a rate called LIBOR (London Inter-Bank Offer Rate) was used as a proxy for the risk-free rate. This is a rate at which big banks lend unsecured money to each other, which is risk-free because big banks never default or go out of business ever.
Nowadays the proxy for the risk-free rate is the OIS (Overnight Index Swap) rate, which involves a great deal less “trust” between financial institutions. It stayed relatively stable in 2007-2009 when LIBOR was all over the map.
Needless to say, you, as an individual investor, don’t have access to investments at either of these rates. And those rates are much smaller than the >10% you want.
Investing is gambling. That’s why you get paid a premium for your money. The more risk the higher the premium to get you to part with it. Smart investors therefore *want *risk because it pays the best. A 10% premium is itself meaningless. It is good if you think the actual chance of failing is one in twenty; bad if you think it is one in five. This is where Long-Term Capital failed. It thought the chance of failure was zero and didn’t put the possibility into its algorithms. The other difficulty is keeping the best risk assessment algorithms to a small group. As soon as everybody competes for the same returns the smaller investors will be out-competed since all investments are finite. Several funds have run into this as more and more people have access to the same information and computers.
You can’t beat today’s system with yesterday’s scheme. The market responds. It works as well as a perfect weather forecast for tomorrow would work every day for a year. Sooner or later reality always catches up to you.
Bottom line: Accept the risk and minimize it.
TIPS bonds have zero risk versus inflation because the returns are adjusted based on the CPI.
If someone did, and they let everyone know, then it would no longer be riskless.
This is not quite true, because of taxes. If you buy $1000 worth of TIPS and inflation goes through through the roof and in a year you get $10000 back, you still get taxed as if you made $9000 even if that $10000 is only worth what the $1000 was originally.
The basic problem is that risk is impossible to measure. I would define risk as “unknown bad things that can happen.” We don’t worry about unknown good things. If we knew for sure that some bad thing would happen we could guard against it and it wouldn’t be a risk. If we knew the exact statistical possibility of a bad thing happening we could also guard against it by hedging or insurance and then it wouldn’t be a risk.
For it to be a true risk there has to be an element of uncertainty. By definition this makes them impossible to define or eliminate. Because of this, professional investors use proxies for risk instead, things like beta and standard deviation. These things have the advantage of sometimes working really well for very long periods of time… Except when they fail completely and catastrophically.
Arbitrageurs theoretically engage in risk free trading, by watching the same securities on different markets. Occasionally discrepancies can occur and they can simultaneously buy a security in one market and sell it for more in another. This is theoretically risk less. In practice it’s more like playing Russian roulette.
There are some traditional strategies for risk less trading. Let’s say you have 10k. You buy a zero coupon treasury bond that matures in 10 years for 7k. You invest 3k in something highly risky. If the latter fails you get your 10k back from the zero coupon in 10 years. If it works, you make boatload of money. Voila! Risk free investing. Of course, really, it’s not. You still have some credit risk, inflation risk, currency risk, opportunity cost, and some other things that nobody has thought of yet.
So, no. There is no risk free investing.
Investing is not gambling. Gambling is always a zero-sum and, since the house always profits, the expected return for the average gambler is less than zero. Investing is typically a non-zero sum game with positive expected returns.
This is oversimplified. Some of the highest risk equities, e.g. small cap growth stocks, historically have had the lowest returns. You also fail to differentiate between diversifiable risk and non-diversifiable risk, i.e. you can increase your risk tremendously by not diversifying, but you will not increase your expected return.
Not so. Smart investors establish an investment portfolio in accordance with both their willingness to take risk and their need to take risk.
Nice, zero risk/zero return … 28 day T-Bills give a 1/4 I think, plus you’ll get your money back three weeks sooner, inflation may hit 1000% !!!
An old Japanese man asked me when I was a kid if I wanted to invest in something that was a sure thing with more than a 1,000% return. Of course I said yes. He reached in his pocket and grabbed a bag of seeds and said give me a dollar, so I gave him the dollar. He said bow go home and plant these seeds and water them and bring them back in 2 months and I will buy them back for $2,000 if they are quality plants.
After a few months he asked my how my plants were doing, I never planted them.TIPS actually only have no risk against inflation “as measured by the CPI.”
The part in quotes is the part that gets you.
There are some good arguments that the The people who put out the CPI are deliberately and significantly understating inflation.
I’m astonished that somebody who has been here as long as you have would spout something that so antithetical to the purpose of this site.
There has NEVER been a long-term period in which the stock market failed to go up by a considerable degree–even after taking inflation into account.
http://www.thesimpledollar.com/where-does-7-come-from-when-it-comes-to-long-term-stock-returns/
That is not risk. That is not gambling. That is cold, hard, mathematical FACT.
An acquaintance of mine, who owns a financial services firm, says, “The day you start to treat your money mathematically and scientifically is the day you begin to win the money game.”
But most people don’t do that. They treat their money emotionally. They don’t understand the basics of how money works. That’s why we get people like you, who spout such utter nonsense.
How about the 17-year period from 1966 to 1983, where the real (inflation-adjusted) return of the S&P 500 was (slightly) negative?