I just want my money and my investments to be safe.
If I had a nickel for every time I heard that statement or sentiment, I would be wealthy. It is a normal and completely understandable sentiment that we would like to hold on to the money that we have been able to acquire through decades of hard work.
But what does safe mean?
I have developed an analogy or story to try to deal with this very understandable concern.
When people want to hold on to their money and ensure that the amount that they have never declines, it forces the investment decision to be all or primarily all invested in cash. Numerous people are very happy to hold large sums in cash and numerous local banks are all too happy to hold the cash for their clients.
We have written numerous posts concerning how doing so is riskier than most people appreciate due to the fact that the purchasing power of cash decreases through time. A dollar today will not purchase a dollar of goods and services in 10 years. If you are trying to maintain purchasing power, then holding all of your money in cash is not safe.
This is the analogy that I hope explains why it would be better for investors not to have all the money held in cash.
If you are presented with the opportunity to purchase an apple orchard where all of the apples on the trees were matured OR you could invest in the various stages of apple farming from seeds to mature trees, what would be the best choice? Believe it or not, that is similar to the options available to most investors.
If you look at the apple orchard with all the trees being fully ripe with ripe apples, you may believe that this would be the best choice for your investment. And if you invested all of your money in this fully ripened orchard, it is similar to putting all the money in cash or cash like instruments.
While in the short run, the apples will be of great benefit to you,but overtime the apples will start to deteriorate and be less valuable. The benefit or utilization of the apples will be noticeably decreased over time. This is similar to an all cash position.
If on the other hand you decided to invest not just in the ripened orchard, but throughout the life cycle of the apple farm, this would not be a problem. Now you will be able to hold in your hands – (to use a phrase common on television involving gold investing) – not only some ripened apples, you would be counting on the continued development of apples for when you would need them in the future.
The way that you ensure that you always have ripened apples available when you need them is to invest in the entire apple farming process. You would invest money into the planting of apple seeds, in a field of apple tree saplings, in a field of more developed trees, and yes even in a field of ripened apples. This way through time you would always be able to consume fresh ripened apples.
Now another fairly common concern is what if the apples do not materialize? While no apple farmer can guarantee that they will have success – one can look to history. Ultimately – history is the only guide we have. If we invest in the apple farm that has been able to harvest apples through various ice storms, tree diseases, and bad weather through time and been able to overcome these challenges to produce fruit, it is likely to do so again in the future. The ownership of the great publicly traded companies is the equivalent of owning the full apple farming process.
So the next time your normal human tendency is to try to collect and hold on to all of the apples that are available today, realize those apples will deteriorate through time and it would be better to invest toward your future needs to ensure that you have apples that will be ripe when you need them.
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