In today’s turbulent investing environment, we’re finding more and more investors valuing protecting their principal above all else. Why?
Because of Loss Aversion.
Loss aversion is the feeling of wanting to avoid a loss and doing everything that we can to reduce the chance of it happening.
Loss aversion is particularly strong in the face of imminent danger – whether perceived or real. For example, very few people will risk driving to the supermarket if a tornado has been reported in a neighboring town.
Risk aversion says that the risk of loss far outweighs any potential gain. The evidence suggests that we feel losses at least two to three times as strong as we feel an equivalent gain. In the investing world, risk aversion drives investors towards relatively risk-free investments to avoid losses.
Many investors prefer to play it safe, as evidenced by the trillions of dollars parked in CDs and money market and savings accounts.
Loss aversion bias drives financial decisions where we find many investors playing it safe all the time – often depriving themselves of achieving their full financial potential.
A prime example of the impact of loss aversion in the stock market is the disposition effect – the tendency among investors to sell stock market winners too soon and hold on to losers too long. Both outcomes deprive investors of maximizing their profits.
The problem with loss aversion is that we’re all hard-wired with Wall Street’s risk-reward model that says high returns only come at the cost of high risk. This risk-reward paradigm is what informs our investment decisions.
Unfortunately, for the risk-averse, this model drives them to perpetually play it safe by putting their money in products like CDs and the like that don’t even keep up with inflation over time. Another way investors play it safe is they diversify away risk to the point of eroding returns.
The Wall Street risk-reward model is not the only way. When you invest in Wall Street, this model rules. Low risk typically translates to low returns (e.g., bonds) with high risk translating to potentially high returns (e.g., IPOs and penny stocks).
But what about outside of Wall Street?
Alternative investments – investments outside of Wall Street – operate under different rules than the traditional risk-reward paradigm. Free of the volatility and collective madness of Wall Street, alternative investments offer the risk-averse the potential to achieve higher returns but at reduced risk.
One particular class of alternative investments operate under a different set of rules than Wall Street.
Income-producing assets backed by hard assets don’t fit the traditional risk-reward rule. Because of the cash flow factor that increases returns over time from the compounding effect, it is possible to achieve high returns at a reduced risk because of the security offered by your investment being backed by a hard asset.
Just as risk-reward means something different in the world of alternatives, so does diversification.
Diversification in the world of income-producing alternatives doesn’t necessarily mean reduced returns. It’s more closely associated with preserving high returns – protecting your portfolio.
Income-producing alternatives lend themselves to diversification across a variety of variables including:
- Alternative Class.
- Stage of Development.
- Investment Vehicle.
- Type of Return.
- Holding Period.
- Geographic Location.
All of these factors serve to preserve one thing – income – essential for growing and maintaining wealth, even during turbulent times.
Don’t let loss aversion prevent you from achieving your maximum financial potential. Increased returns don’t necessarily mean increased risk. Use loss aversion to your advantage. Seek out income-producing alternative assets that reduce risk while increasing returns.
So what should you do?
Play it safe at all times?
Accept more risks?
CAST OFF THE CHAINS OF WALL STREET
Don’t believe the Wall Street hype.
IT IS POSSIBLE TO ACHIEVE HIGH RETURNS WITH REDUCED RISK.
Savvy investors who turn from Wall Street towards alternatives follow a common thread:
- They invest in private companies over public companies.
- They invest in real assets over soft paper.
- They invest for income.
- They invest consistently over time.
- They invest in for the long-term – compounding their investments.
- They invest in things they can understand.
- They keep it simple – no need for complicated investment models or algorithms.
- They leverage the expertise of others to further their diversification goals.
Join other savvy investors and invest in alternatives. Find out about upcoming opportunities today!
Investor, writer, speaker, and founder. Kyle Jones, key principal of TruePoint Capital, is accountable for investment decisions, asset management, and overseeing financial activities, operations, and investor relations. Kyle additionally is a Global Sales Leader for a large Fortune 100 technology company. Kyle received a Bachelor of Science degree from Texas State University – San Marcos.