The Issue of Safety

 Last weekend I wrote a little about what I consider to be the importance of establishing streams of income. I included the statement: "I believe that creation of diverse streams of income can be a critical element in assuring financial comfort." One anonymous blogger apparently mentally added the word "safe" to my statement when he (or she?) wrote: "Safe income streams that should be part of every ones portfolio has now become a myth exactly like the buy and hold strategy. That strategy has really been a myth for as long as I can remember. Not even the safest of all investments, Money Market funds, are immune to loss."

No one, least of all I, suggested that any specific income stream was completely safe. In fact, as far as I can tell, nothing in this world is safe. Breathing can be dangerous depending upon what is in the air we breathe; looking both ways when we cross the street doesn't absolutely insure that we won't get run over; putting helmets on our kids when they are engaging in activities may reduce the likelihood, but it doesn't prevent head injuries. Risk is everywhere and it is certainly present in trading and investing. I wrote "Trade Your Way to Wealth" , in part, at least to show readers where the risk is and ways to reduce or manage risk in their investments.

In my new book, "Smart Investors Money Machine" , I demonstrate a wide variety of ways we can create streams of income, but I also try to discuss risks associated with each strategy. In my view, one of the important ingredients in successful investing is knowledge of and management of risk. If the anonymous blogger was under the impression that I think simple diversification makes for safety, I failed to make myself clear. Diverse streams of income, like the helmet on a child, may reduce risk, but they do not remove it. Nothing removes all risk.

Recently a neighbor asked for some coaching as he was re-entering the investment world. He told me he wanted something safe with a very high income flow. I said I thought that is probably what everyone wants, but the combination is very difficult, if not impossible, to find. As a generality, the higher the potential reward the higher the potential risk and vice versa. Only by gaining knowledge can we make decisions and implement plans that help us manage the risk no matter what we are doing.