The Myth of Risk Equals Reward – Episode 249

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler. Hello listeners and welcome to the Prosperity Podcast. Today we’re going to be talking about risk versus reward. And one of the myths is risk equals reward. And today we’re going to bust that myth. So Kim, are you there with me? I am, Spencer. Happy Monday to you. I guess it’s not going to be when people are listening, but it is for you and I. It is. They’ll pick it up on a Tuesday, so that’s good. So let’s dive into this. Why is it common knowledge for people to think risk equals reward? And then let’s figure out and demystify that so that people can understand the

[01:01] truth. Absolutely. You know, it’s funny that you say that it’s common knowledge. It’s knowledge, but it’s not correct. And I think it’s common because the media has perpetuated it. And it’s the media that’s out there talking. And then of course there are financial advisors that have also perpetuated it. And our society has just picked up the sentence that, quote, more risk equals more reward. And so it sounds cool. And yet it’s seriously flawed. It is actually. So maybe where we can attack this first is talking about risk and what it actually means. Because I think that definition is skewed in most people’s heads. Yeah, I would agree. And to me, risk, and this is something that Todd Langford of Truth Concepts quotes

[01:55] all the time, risk is the propensity for loss. That’s how I would define it. How would you define it? That is exactly. Well, going through the truth training, that’s how I’ve shaped my mind as well. You know, I used to think, oh, risky. That could mean potentially higher reward. But really, risk definition is simply how much likelihood am I going to lose this on investment, opportunity, whatever it may be. Well, it’s so funny. In the financial services industry, they actually have something called a risk tolerance questionnaire. And I used to do these with people. And they’re often put forth. You know, they might be on paper. They might be on a website. They’re put forth by companies that provide investments where risk is going to be a

[02:47] part of the investors work with them. And the idea is that you’re supposed to be able to identify, in fact, sometimes even put a number on your, quote, risk tolerance. And I don’t know about you, but my risk tolerance is zero. Like, I don’t have a tolerance for loss of money. You know, I’m exactly the same way. Now, in our bonus episode about cryptocurrencies, one of the things that our guest said is he looks at his cryptocurrency investments with a stoic or stoicism ideology, which means he puts the money in and he already assumes it’s gone. So from his perspective with the cryptocurrencies, he’s not expecting any return. But when it comes to us in our normal day lives, when we’re saving for the

[03:44] future, we’re looking to create some wealth either for future generations. I’m there with you. I’m not looking to lose that because I’ve worked hard to gain it. Absolutely. And while I want to absolutely admit that I’m not perfect in this category, either as an investor or as an advisor, we have worked with investments that we thought were absolutely certain to return principal. Sometimes even that certainty falls by the wayside, which, of course, is extremely frustrating as an advisor. And it’s scary as an investor. And it’s interesting, these risk tolerance questionnaires, they’re designed to try to help people quantify how much money they are willing to lose. And truly, when you think about that, it is ludicrous.

[04:38] And yet again, I’m admitting that we’re guilty of it too. We’re human beings. We make mistakes. That happens sometimes. And yet, to go into an investment with the knowledge that loss is potential is a really interesting paradigm shift. So your cryptocurrency expert, he’s going into that investment with very small dollars in terms of the percentage of his net worth. He’s going in to learn. And so it’s completely legitimate that he would go in anticipating loss. But I think our society has been really grayed out, is the term I want to look, you know, when you look up a software package and you don’t buy the full version and so some of the things aren’t an option to you, that graying out mentally is what has happened to our society, where we’ve become immune

[05:35] to this idea of losing money and somehow it seems OK. And yet it’s so wrong. I mean, you and I both stated and we know that our clients feel this way, too, that we really don’t want to be losing money. And so why is it that our society has accepted that loss is acceptable and has accepted that risk equals reward, but that part of that reward is losing money? I wonder what it is about our society that’s made us accept that. You know, the conclusion that I’ve come to actually comes back to one of the principles of prosperity. And I think it’s due to control. And it falls into two categories from what I see, because the majority of people, when you talk with someone off the street that has a basic understanding of

[06:28] finance and money, they think that the safest thing is a 401k. And we look at it and we think, sure, like, if you want to give up control and you want to deal with all kinds of limitations and you want to be subject to potential decline in the marketplace, go for the 401k. But I think it’s due to control, because people, whenever they don’t have to feel the responsibility, they give up their control. They can accept that for some strange reason. What do you think? I think it also comes down to an Americanism that is so prevalent in our society right now, and that’s that we desire something for nothing. So whether you’re looking at our health, you know, we want something for nothing. We would like to have healthy bodies, but we don’t really want to do the work.

[07:23] And when you look at our knowledge, we want to be smart and educated about things, but we don’t want to put in the effort. And when you look at investing, we want to have the results, the good growth, the large balance sheet, so to speak, but we don’t want to put in the savings dollars to build up enough money to then be able to actually invest. You know, I think back to my early years when I was going through my certified financial planner designation, which I will admit I no longer have because I don’t agree with the things that that institution stands for. Yet at that time, it was taught in the schooling that we went through that you saved first and then invested. But in practical implementation, nobody ever did that.

[08:19] Like, everybody wants to go straight for investing. So then we’re back into this something for nothing. Like, we want to have the fun, quote, of investing, and we don’t want to do the work. And the work prior to being able to invest is to save money. And we as a society do not want to put in the time or the effort or the actual physical dollars to save money first. We want to go straight to investing. And that is maybe the more sexy subject to talk about, if you will. And yet it is what is destroying families because they don’t have savings. And they put, for example, all their emphasis on that 401k that you mentioned. And whether or not their mutual funds inside their 401k are doing well, they still don’t have any savings.

[09:10] And that’s hurting them. And so this focus on investments, this focus on risk tolerance, this pervading attitude of something for nothing is, I think, what’s driving a lot of this. You know, I completely agree. It’s pretty challenging in our world to have a paradigm shift because we live in a society now where with your cell phone, you can order anything in the world and have it shipped to you for free in two days from Amazon. You can find the definition of a word you don’t know. Or if you’re trying to fix something around your house, you’ve got a YouTube video that can show you exactly what to do instantaneously. Whereas I think a lot of that’s crept, as you’re mentioning, into the financial place where we see that mom and dad worked hard.

[09:56] And maybe we don’t see the work, but we see they have a nice house. They’ve got savings. And we want that, too, without all the work. Absolutely. So how can we turn this around for our listeners so that they can, first of all, understand that higher risk does not equal higher reward? And I think that’s probably a given for a lot of our listeners. And we’re going to see a very interesting time here. We’re recording this in early 2018. We’re really ripe for a stock market correction. That’s most people’s typical place of investing. And it’s the most common place where the higher risk supposedly equals a higher reward. So that’s a given. And I think, really, the next question is, OK, so now what?

[10:46] What can you do to, first of all, make sure that you don’t lose money? Second of all, make sure that you’re saving first instead of going straight to investments. And I actually should have made that the first one. And then third of all, what places are out there to put money where the risk of losing those dollars is very, very small? So help me work through those. So the first thing we decided is save first, right? Save first. Yes, absolutely. That is the most important. And so our favorite place to save money is the life insurance arena. And a lot of people talk about life insurance. I’m talking permanent whole life, dividend paying, whole life insurance from a mutual company. You’re going to, out in the marketplace,

[11:39] hear that referred to a lot of times as an investment. And I really disagree with that language, because whole life is not an investment. We shouldn’t be comparing it with investments. It is savings. And the reason that I like to use it for savings is twofold. One, we get a little higher rate of return than we do at the banks. That return is also without taxes, which is handy. But two, it is forced savings. And that’s the reason a lot of people like the 401k plan is it forces them to save. And I understand that. As a human being, it is sometimes helpful to have structures in place that enable us to just be in the habit of saving. And having a life insurance premium notice or a bill, literally, I’ve got some friends that call

[12:29] life insurance savings account with a bill, having that bill show up or that premium notice show up every month or every year is a very helpful tool. And I know our family would not have the kind of savings that we do if we didn’t have that bill show up. So that’s first thing. And then remind me what the second one was. So I have where to put money, but I think that’s gonna be in spot number three. Okay, agreed. So the second one that we should maybe cover is if you have your savings, then what do you turn to next? And the 401k is a very common place. And it’s not my favorite because it does lock money up. You mentioned the Fifth Principle of Prosperity. It is not in your control. And another challenge that I think a lot of people have

[13:21] is the really good investments that do protect principle often require lump sums. And there are a lot of families that don’t have lump sums to invest. If you do, then we have definite places for that where 25, 50, sometimes even 100,000 are the minimum. But for a lot of families, they don’t have that. So the ability to save money monthly to then build up a lump sum to invest is a very critical intermediate step. And again, the life insurance does a good job with that. So that can be item number two before we jump forward to the, like we said, I mean, it’s funny, even myself, I get it. The investments are more exciting to talk about than the boring life insurance policy. Even though the life insurance policy

[14:14] is guaranteed to increase every single year, and even though it’s a boring level of increase, it’s guaranteed to do that every single year, and it’s something that we forget about. So just my nod to that product and my understanding of it has just continued to increase over time and my use of it as I see more and more clients benefit from having that cash value of life insurance, but I’ll even admit, it is boring. However, it’s very effective. Yeah, it mitigates the risk. Now, as we dive into the next piece, which is where to put the money, my mind, and this is just my background, I’m automatically thinking about cash flow because that’s how I operate. I’ve owned businesses for years, real estate, rental properties,

[15:07] and I have a publishing company. So I’m always thinking, where can I put some capital that’s going to give me additional cash flow? Do you think from that same perspective as well? Absolutely, and yet, I always like to ask clients what they’re more interested in, the growth of the money or income or cash flow from that money. And while you and I are going to be probably a little bit more often focused on cash flow, a lot of clients are more focused on growth, and that’s totally legitimate, especially if you already have a lot of cash flow issues handled, i.e. in the form of a salary or maybe another income from another family member or maybe you have already sufficient alternative income from investments or other things that provide that cash flow.

[16:03] But getting clear on what you want that money to do is very, very important. So again, we’re not talking about savings now, we’re talking about investing. Do you want your invested dollars to grow or do you want them to create cash flow? And a lot of people could say, well, those are kind of the same things, but they’re really not because investments that grow, and so I’m thinking about life settlements and oil and gas investments, very specific ones that we have that if you’re interested in, I’ll give an email at the end of the podcast, you can reach out to us and get more information. Those are growth-oriented investments, they do not pay monthly income. Whereas if you really want cash flow

[16:43] off of your investments, that is a completely different arena, maybe bridge loans with real estate or bridge loans with a land lease or something else that creates monthly income. That’s different than growth. That is very well said. I think that it does depend on the person’s mindset, the way they look at it. And I would almost say that your salary type of employees are gonna be focused on that growth. I totally agree with what you’re saying there. So it is fun. We also have on the growth side, a relatively new one that is enabling people that only have 25,000 to get involved. So if you’re interested in a growth-oriented environment that’s less than one year, that’s gonna have lower than, so like our definition of investment

[17:38] is normally double-digit, but this is gonna be more high single-digit. Let us know. And the best email for that is hello at partners4prosperity.com. And it can be IRA money or regular money. And then I also am really excited about, so that’s again a growth one, I’ve got some income ones that are new to our environment as well that we’re going to be starting to share with people that can create that monthly paycheck. So maybe you’re over 59 and a half and you need your IRA to create monthly income, or maybe you just have a lump sum and you want to create monthly income because your cash flow focused from that lump sum. Then we have two or three different bridge loan environments and a land lease

[18:25] that will do that at varying levels of the game. More often, well those can have the smaller minimums too, 25, 50,000. Some of these investments are for accredited investors only and so that’s a million dollar net worth or two to 300,000 of income depending if you’re married. So when you’re reaching out to us, if you’re comfortable, it’s super helpful to know whether you qualify for accredited or not. If not, those of you that are used to emailing with me, you know that I have no problem asking. So it’s done in an effort to try to get you the information that is most specific to you and I really like it when we can send specific investment opportunities to people. We do have some generic educational information

[19:10] about these arenas though if that’s helpful to somebody and of course, while we work in all 50 states, not every investment is available in all 50 states. Most of them are a good 40, 45 but there are definitely some states that have some limits on these things. So that’s a helpful thing for us to know as well when you share us your request. Again, hello at partners4prosperity.com. State of residence if you feel like sharing it and the fact that you’re either accredited or not and we’re happy to help either way. We have investments for people either way but the investments that are available for accredited investors are different than the ones that are available for non-accredited investors. You know, what a great explanation.

[19:56] You know, I think as we wrap up and provide a summary, it makes me think of this and I’m kind of putting together the scorecard in my head and it says the foundation is you gotta have savings first. That way, one, you’re mentally in the right state and you’re financially in the right state and after you have your savings first, then you can begin to look at investments and the personal scorecard that you can take and you can ask yourself, hey, am I focused on cashflow or am I focused on growth? And just by answering some of those simple questions, it’ll help you go down the correct path and again, send an email to hello at partners4prosperity.com and include as much or as little information as you need.

[20:43] Again, Kim, you’ll follow up and ask all the questions needed and be able to lay out all these different options so they can make the best choice. One thing is certain, risk does not equal reward. Very well said. Yes, we wanna bust that myth without a doubt and help people understand that risk truly means the propensity for loss and so we’ll instead be focused on investments that do not have that. Excellent. Well, thank you for listening to another episode of the Prosperity Podcast with us. We’ll bring you some more coming up soon. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partners4prosperity.com. If you liked this episode,

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