Monday, July 09, 2007

When Avoiding Risk is Too Much

During my last net worth update you might of noticed I had a fair amount of cash sitting in our ING account. The reason was I was expecting some news which would have let me use that cash in a private investment. Well that information was delayed and then delayed again, so I was talking to my wife about what we should do and she suggested just investing the cash elsewhere. She made one comment that really hit home for me "What's the worst that could happen? You lose some cash, but if you make a good return in the mean time you could off set that. At least it would be making more than the 3.5% in the ING account. " I was so focused on not losing that money I lost track of the bigger picture.

So we moved around $4500 over to her investment account and picked up some more EIT.UN shares last week with a yield of 12.5%. With that current yield being 3.5 times greater than the ING account we really only need about 2 months of distributions to break even as compared to the ING account (after trading fees). After that point, it is all increased yield (also note that about 40% of the distributions will be treated as capital gains when my wife sells the shares which will be taxed less than the interest in the ING account). Also this plan provides a nice investment right now in case the other one falls apart.

I also thought about the fear of lose of capital. If I'm truly that scared of it we can always put a sell order on the shares and get out if the value drops too much. Overall risk can be managed, you just have to know your objectives and what you can tolerate and then plan accordingly. Don't let the fear of lose cause you to make bad decisions like I was doing.


FourPillars said...

I would have to disagree with this strategy. If you have money that is earmarked for a specific purchase in the near future then that money should be in cash in order to ensure that all the money will be there when you need it.

Mike said...

Yup, too many people get scared of 'risk' that they put their money in 'safe' investments like ING. But if inflation is 4%, the ING and many other safe investments are guaranteed to lose money (over time)! How much riskier can you get?

Canadian Dream said...


The money was earmarked for something, but that investment may not ever pan out. So I could have my cash linger in an ING account for a few years before I need it. So that is why I took the risk and made another investment in the mean time. I agree that if I didn't have this earmarked for an investment I would have likely left it cash since I would be using it in less than a year.


Actually there has been research that states the standard inflation measure used by the government over states the issue by 0.5 to 1% (depending on Canada or US). In Canada the current inflation is around 2.2%, so I'm likely ok with a 3.5% investment for a short period.