November 19 2021

What is the most secure investment?

There is no such thing as a secure investment, sorry! There are rather investments that makes you feel secure. In fact, this has nothing to do with the low probability of losing your shirt, or the low volatility of the investment through its life. I for instance could feel more secure in a speed car driving at 100 miles/hr on a highway, than in a Honda Fit at 30m/hr in a slow-moving traffic. The first situation is arguably riskier than the latter.

Feeling secure about an investment has to do with how it resonates with your risk appetite, your objectives, and most certainly, what you feel most comfortable with. To continue the car analogy, you might be more attentive to how the car is built, who drives it, and how it appeals to you, as opposed to the speed such car is moving at.

Most usually investors feel falsely secure investing in real estate. Why? For one, it is tangible, tried-and-tested, and banks give you leverage for it at a high 70% of the underlying value. However, this is usually a high concentration of resources on the family’s balance sheet, transaction costs are high, recurring charges are plenty, and admin is certainly burdensome. Yet, people like it because the investment time horizon is long and usually such investment carry the inflation and economic growth properly. It makes a good job at preserving value, but is probably not a very good risk/return optimization for most.

Another temptation we see, is investing in one’s own company. A necessity for startupers, an imposed part of a remuneration package for others. The result is the same: it gradually builds a massive stock exposure to a single company, a great thing for equity build-up, but a terrible thing from a portfolio concentration standpoint. Peter Thiel and I might differ on this one. In his book “Zero to One”, Thiel praises the concentrated portfolio approach [in VC investments] as a surest route to higher multiples. A go or bust theory of sort. While it works for low-hit ratio VC-type investments, you might want to diversify away if this single stock exposure grows into a large part of your wealth.

What do you diversify into then? At the low end of the risk/return spectrum, high-probability guaranteed returns no longer appear secure. Sovereign bonds issued by wealthy nations are threatened by the prospect of higher rates and inflation. Can you still call investing into a 10-year US Treasury secure, when the hope is to get -1.5% real return on average over the life? The certainty of a small loss is probably much better that the uncertainty of a bigger gain. This is the proverbial devil you know instead of the one you don’t know, I suppose.

The most obvious investment to preserve long-term value is still a diversified portfolio of equities, whereas long-duration bond exposure would tend to destroy value these days. You could also roll positions in short-term investment grade bonds, high-yield bonds, and private credit transactions if you’re seeking recurring income.

Let’s face it, the sacrosanct 60/40 equity/bond market portfolio today looks like 70% in equity, the rest split into short-term bonds, commodities, REITS, and gold. Outside listed securities, you might want to consider private credit, VC, and (yes) crypto. Take it with a pinch of salt, adjusting for your own project passions and risk appetite. Again, this is how the car should be built, but you might want to entrust a professional pilot to drive it.

Happy secure-enough investments everyone!

360 Advisory – Markets