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People talk all the time about things they deem “too risky” and typically make decisions they deem to be “less risky”. However, a lot of people lose quite a bit of money when doing so because the term “risk” hasn’t been properly defined, so any serious discussion should start with an interrogation of the concept of “risk”.
Often times CD and savings accounts are considered to be one of the least risky investments. But are they? Depends on how we define “risky”. If your interest rate doesn’t exceed the rate of inflation (right now CD rates are not even coming close), then you are actually losing money. If you know the rate of inflation is higher than the rate of return on your CD or savings account and you invest the money anyways, it is a guaranteed loss of “real” (inflation-adjusted) dollars. So, that may be the riskiest investment of all if you define risk as being “the likelihood of losing money on an investment”.
I know a number of people who thought that a diversified set of mutual funds were a low risk place to park their retirement money because an "expert" would invest it on their behalf. The reality is that most funds can’t even beat the S&P 500 index. But you also have fees and capital gains tax and, if you do make a net profit after all of that, it needs to be higher than the rate of inflation in order to make money in 'real' dollars. But, owning mutual funds means you also have very little control over your investments as well.
I would submit that asset classes as a whole are not inherently high risk or inherently low risk. Rather, the level of risk relates directly to the investor’s level of expertise in that particular space and the extent to which they have been able to cultivate a (legal and ethical) advantage over other investors.
Warren Buffett has often stipulated that “over-diversification” is not strategic for people who have cultivated significant advantages in particular investment spaces. For those people, a strategy of “focus investing” to leverage their advantage in their area of competence is far more lucrative than diversifying into other spaces that they don’t understand as intimately and where they don’t command the same advantage.
One of the reasons smart investors like residential investment property as an asset class is because it offers a number of unique benefits that other asset classes do not. So there are some inherent advantages to the asset class itself.
However (and this is an important caveat), even with those unique benefits, that doesn’t mean that all properties are a good investment. The truth is that most U.S. properties are not a good investment. So, how do you sift through the riff raff and find the gold?
We are not legal, tax, or financial professionals. The content on this page is for informational purposes only and should not be construed as individualized advice. It is your duty to consult with your own tax, legal and financial professionals about your individual situation, applicable laws, and the suitability of any investment property for you personally. All real estate investing involves risks, which buyer assumes, and no specific returns can ever be guaranteed by anyone.
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