SECRETS TO MAKING “JUST RIGHT” INVESTMENTS

The “Three Bears Test”

Whether we know it or not, you and I are making our investing decisions by using the “Three Bears Test.”

You remember the story called “The Three Bears”, don’t you?  It is about a papa bear, a mama bear, and a baby bear.  They had three bowls of porridge, three chairs, and three beds. 

One bowl of porridge was too hot, one was too cold, and one was just right.  One chair was too big, one was too small, and one was just right.  One bed was too hard, one was too soft, and one was just right.

You and I can apply this to many things in life.

A cup of coffee can be too hot, too cold, or just right, can’t it?   A sweater can be too big, too small, or just right.  Your driving speed on the highway can be too fast, too slow, or just right.  The temperature can be too hot, too cold, or just right.

What are some other examples that come to mind in which you apply the “Three Bears” test in your life?

Have you thought about how you can use this test whenever you choose an investment?

INVESTMENTS

Here is one way.  Investments can be too risky, too safe, and just right.

Perhaps you evaluate investments intuitively, without thinking about this approach.  Perhaps it would be helpful to be more intentional when you evaluate investments by using this “Three Bears Test.” 

TOO RISKY

I have chosen not to invest in lottery tickets.  I think the lottery is too risky as an investment.  I’ve heard the odds of winning the recent Mega Millions Lottery to be 302 million to 1.  In other words, the risk of losing my “investment” is very, very, very high.

Maybe buying lottery tickets is a good buy if you buy the ticket for entertainment.  For $2 you receive a couple of days of thinking about being unbelievably wealthy.  You buy a little hope.  But, as an investment, for me, the “Three Bears” test would say it is too risky.

By too risky, I mean there is too much potential of losing my investment altogether.

Now, risk is something we have to consider when investing.  Some risk is needed.  To achieve a decent return on our investment, we will likely choose to take on some level of risk.  Think about risk as a line running from “too risky” at one end and “too safe” at the other end.  Both extremes are not “just right”. 

Too much risk is not wise.  Too much safety is likely also not wise.

We’ll look at investments being too safe in the next section.  Right now we are talking about being too risky.

Cryptocurrencies are too risky for many investors. They may have potential for large gains, but there is also a significant potential for large losses.  This was seen over the last year.

Trading in currencies like the dollar or the euro or the yen is too risky for many of us. 

Investing in the stock market is too risky for some people I know.  Their experience in the Great Recession a few years back was too painful.  They got scared when the market fell and sold their stocks.  They took a big loss, and have never recovered.  For them, the stock market is scary, too risky.

Each one of us has a different tolerance for risk. 

Evil Knievel had a larger-than-life willingness to live with risk.  Some people won’t even leave the house on Friday the 13^th because they are so risk-averse. 

My son scales rock faces like the Nose on El Capitan in Yosemite National Park.  Some won’t even ride a Ferris Wheel at the county fair.

What is your tolerance for risk in life?

Are you clear about how much risk you are willing to take with an investment? 

We, at Attune Investments, take a good, hard look at risk with every potential investment we make.  We find some properties are simply too risky.  Some are in the wrong market.  Some aren’t cash-flowing.  And we find many where the price is too high for the kind of returns we expect to achieve. 

When we do a “worst case” analysis going forward sometimes we don’t see a way to be able to make the investment work.  We need to be able to mitigate the risk.  But sometimes there is too much risk that we will lose the investment, potentially leading to default.

Someone else might choose to make that investment, but we won’t.

David Kamara, a friend of ours and fellow investor in the Detroit area, recently wrote to his investment partners.  His first guiding principle is “Do Not Invest in Headaches”.  He noted that “being able to sleep at night is important to me”.  Is it important to you also?  Too much risk makes it hard to sleep at night, doesn’t it?

One answer to the “Three Bears Test” is that the investment is “too risky”.

How do you determine if an investment is too risky?

TOO SAFE

Investments can be “too safe” as well.  This is a possible second answer to the test.

I know an older woman who was afraid of risk.  She put all her money in a savings account.  With FDIC insuring the principal that is a pretty safe investment.  But, it was “too safe” for her because her investment didn’t produce enough of a return on her investment. 

She had to dip into the savings account balance every month just to pay for groceries and pay utilities.  She couldn’t afford to go to the hairdresser anymore.

Her investments were too safe, like the porridge that is too cold. 

At a minimum, as Mike Jacobson has often pointed out, wise investments will at least keep up with inflation.  These days that means they have to be working even harder than they did a couple of years ago.

Now, putting some of our investment dollars into safe investments is likely a good idea.  T-bills are one example of an investment some would consider to be appropriately safe.  This is a way to protect your investment capital should things go really bad globally.  Some say gold and precious metals fit into an appropriately safe investment.  A safe investment will at least maintain its value, you hope.

We have seen here two types of risk: loss of principal, and loss of purchasing power through inflation.

As we mentioned before, risk is a part of investing.  Without enough risk, there is likely not going to be enough return on the investment to keep up with inflation. 

Will cash in the bank keep up with inflation?  Will precious metals keep up with inflation?  Will buying stocks and mutual funds keep up with inflation?  Maybe.  Or perhaps they are too “safe”.

JUST RIGHT

Sometimes the cup of tea is too hot.  Sometimes it is too cold.  Sometimes it is just right.

So, we have looked at two of the three statements we can make about a potential investment as we apply the “Three Bears Test”.

We will eliminate some investments because they are “too risky” or they are “too safe”.  Each of us will have to determine our own, personal answers to which answer we will give about a particular investment.

Hopefully, we will choose investments that are “just right” – for us.

Just like porridge or a chair or a bed that is just right in the story, we would be wise to do a bit of evaluation of our investments so we choose ones that are just right.

Just right investments will have enough risk to generate the kind of returns we desire, but not too much risk. 

Just right investments will be safe enough to at least return our investment dollars and give us an appropriate return. 

Just right investments will probably have benefits beyond the dollars involved.  They will align with our values.  They will make the world a better place.  They will match up with the big “WHY” that directs our life and choices.  They might even bring a smile to our faces and help us sleep well at night.

But, at least they will be wise as investments.

We at Attune Investments discovered investments in real estate to have the potential to be excellent, “just right” investments.  As we have discussed in previous blogs, real estate can produce income, provide the tax benefits of depreciation, experience a growth in equity, allow us to amortize a loan and pay down debt increasing the overall value, and are able to be leveraged.  This can multiply our returns.

We seek investments in real estate that are not too risky.  With all of these ways of growing our investment, often well beyond inflation, they are not too safe, either.

What are some investment decisions you have made that have proven to be “just right”.

CONCLUSION

Take a look at how you make your investment decisions.  Perhaps you will find it helpful to be more intentional in using the “Three Bears Test”.

HELP US GET TO KNOW YOU BETTER

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