This saying suggests that it is better to hold onto something one has already than to risk losing it by trying to attain something better. Is this the right approach to investing?
Over the last 25 years I have come across people that have had family members that have kept large sums of money hidden in their homes or other places. Perhaps this was due to a distrust of financial institutions or just wanting to have access to money in case of an economic collapse as has been seen in history. I remember after my grandmother died my grandfather trying to remember all the hiding places where my grandmother had stashed away rolls of money just in case this money was ever needed.
Quite often as well over the last 25 years I have come across those that would only have their money invested in savings accounts or term deposits at their bank. Clearly better than keeping the money in a suitcase under the bed but with interest rates as low as they have been it is not a lot better. So, the question is should we risk our money for the potential or making more money, or should we just be satisfied with the certain return of having our money in the suitcase or in low yielding bank accounts or term deposits?
The answer really depends on two main aspects 1) Do you need or want a higher return and 2) Do you have the appetite for risk and if so then how much risk are you willing to take?
I have had clients that know they could be earning a higher return than we are able to get them on very secure government bonds or bank term deposits, however they are content with having virtually riskless investments as they have sufficient wealth that they don’t need or want anymore return than was is achieved by these low yielding investments. They don’t see any point in risking their wealth in the pursuit of higher returns as this could lead to them potentially not having as much wealth. Over the years I have come to accept that some people are satisfied with lower returns especially if they don’t need any more return. For these people the bird in hand is worth two in the bush as they are content with what they have.
I think it is great when people have enough or more than enough wealth and are content to not take much risk at all. However, in my experience most people either need to or want to take some risk to achieve higher returns. The challenge then is how much risk should be taken on. This of course can vary with age, income levels, financial stability, and of course one’s personal appetite for risk. We know historically in the markets there has been a general trade off between higher risk and a higher potential return.
So, if we have an appetite for some risk should be risk our one bird for the two in the bush? My view is that we should take calculated risks where the probability of a favourable outcome is high if we are OK with the risk. I have seen over the years the progression of the risk questionnaires and I find the questionnaires we use today are much better than a few years ago. Using a good risk questionnaire can assist us in determining the appropriate level of risk to take. Then using a well-developed investment portfolio such as the Planwell Net Return Portfolios with a range of portfolios from very conservative to more aggressive can be a great way to invest and take on some risk.
We know that if we have $100,000 today earning 2% that in 40 years this will have grown to $220,000. However, at 10% this same $100,000 would grow to $4.5 million over the same period. The magic of compound interest is astounding especially over longer periods. I would equate the $4.5 million to the two birds and if I was younger and could accept the higher risk I would go for it with a good equity-oriented portfolio like the Planwell Net Return Equity portfolio.