You are actually taking on more risk than if you had some invested in different vehicles. The truth is you're losing more money by not having any of it generating higher potential yields. Likewise, putting all your money in higher yielding vehicles (for instance, call options) is a lot of risk too.
There's a calculus to understanding how much you should have put into different vehicles (including cash in a savings account) to take on the most conservative position.
The way you're playing is you are forfeiting and losing by taking on more risk than you think. It's weird to think about but you need to factor in inflation and cash becomes worth less when it is just sitting there. It isn't volatile but it is mainly deterministic. Some diversity in your arrangements would protect you better.
There is risk in cash, it is called inflation, if you bought a car last year you lost 7% + depreciation of the car since you bought it. The SP500 is up 11% since last year.
This means you would have lost 7% to inflation, 11% to potential upside plus depreciation of your car. Assuming your car did not depreciate because of current car production shortages you lost 18% of your money buying cash vs 3%-4% interest on the loan.
If there is only one investment vehicle (other than the stock market) that offers considerably higher returns than everything else, then that vehicle carries pretty by definition a much higher risk that you seem think it has.
Numbers. It's all about how you feel about that risk of crashing vs the potential payout.
Say I'm squirreling away $5k a year for a new car in 4 years. Every year I put in another $5k, so by the end, I've put in $25k.
If I put that in a typical savings account, I earn 0.1% and come out $50 ahead. Effectively 0, or losing value once you throw in inflation.
Go with stocks, at a 5% return, I end up with over $27k, and at 8% I have over $29k. It's also true that I could lose value, and that's the gamble.
So it's a matter of your comfort level, obviously, and if you can't afford to lose the money, don't invest. But in many many cases, the reward outweighs the risk.
I view it that I'm much, much more likely to get a return > 0.1% than experience a loss over 5 years, and I'm willing to accept the risk.
All returns in the space of rational strategies* are the same when adjusted for risk, which is tightly related to those vehicles subject to classical market forces. A lit oven is not a particularly great place to stash your cash, even on a risk-adjusted basis. I don't know the particulars of the situation in Denmark, but they could be intentionally making savings an irrational decision so that rational money flows elsewhere.
There is no investment without risk. And in fact, volatile times (as well as recessions) are some of the best times to invest. I wish I had had more liquidity in 2009.
And when comparing inflationary effects, I bet if you gave a true comparison between the quality of the cars available in 1972 and 2012, adjusted for inflation, that the 2012 cars would win out.
Agreed. However, betting that over the course of your lifetime, the entire market (as represented by an index fund) will trend upwards seems like one of the safest bets around. And conversely, sticking your money in a savings account entails risk as well: you risk having your money decrease in value as inflation occurs, since you get paid much less interest than the rate of inflation. The question then becomes "which investment has the best combination of risk and reward?".
That's something of a false dichotomy as there are many other options. However, diminishing returns kicks in so you eventually start making risky investments.
In general, the higher the variance in outcomes, the higher the expected payout of an investment.
Also, if you have more money you can decrease the variance in your payout by making multiple uncorrelated (1) investments.
That can make investments that are insane for the average citizen look as huge opportunities for the very rich.
For example, consider a game using a fair coin “put in $100k, heads you lose everything, tails we pay out $201k”.
If you have 100k in savings for retirement, you probably wouldn’t want to play that game. People who have $100M, on the other hand, might line up to play it a thousand times, as that game, on average, pays out 0.5% per game played.
I would hope manny of those shorting Tesla must have thought this “game” is similar: high risk, but an expected payout that is better than that of less risky investments.
(1) there’s a risk there, as totally uncorrelated investments do not exist anymore in a global economy.
I think you're wrong. 'risk' is where I invest my money somewhere I can expect to lose some/all of my investment. Placing my money into the likes of a JPM or SVB, etc. should be RISK FREE because a) I am not investing my money and b) To recognise the fact it should be close to risk-free, I receive negligible interest on my deposit.
Think of maintaining a smaller emergency fund as a form of risk-taking. Every form of investment is a risk, so we are hardly new to risk-taking here.
For example, I keep a very low cash balance and divert most of my surplus to investments. This is partly a gamble, in that I may be forced to sell at a less than ideal time, and partly a credit-backed risk in that my credit cards provide me a buffer large enough to liquidate most of my investments.
You are ignoring that with investing you are taking risk. If you ignore risk passive investments would already be priced higher. Risk == return when it comes to passive investing, of course over a very long time frame.
There's a calculus to understanding how much you should have put into different vehicles (including cash in a savings account) to take on the most conservative position.
The way you're playing is you are forfeiting and losing by taking on more risk than you think. It's weird to think about but you need to factor in inflation and cash becomes worth less when it is just sitting there. It isn't volatile but it is mainly deterministic. Some diversity in your arrangements would protect you better.
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