What is “Safe” for an Investor?

One of the most challenging parts of communication is that we use words that have different interpretations depending on one’s perspective and experience. We tend to use words without realizing the other party may have a completely different (personal) definition…and this is how a lot of miscommunication occurs. It’s not intentional; it is simply a failure to realize many of the words we use have multiple subjective meanings.

For example, advisors use the word “risk” as if we all define it the same. But investors define risk much differently. Financial professionals may rightly define risk as the risk of outliving your money, whereas many investors define risk as the possibility of a recession, bear market, or even a loss in nominal value of the account.

How Investors Define Safe

Most investors define money as safe as an investment that does not lose nominal value. Many investors hide out in CD’s and savings accounts to ensure they don’t lose nominal value, even though their future purchasing power is likely to be decimated. And the media doesn’t help us with this perception, as evidenced by the bank advertisement I saw yesterday (Mar 13, 2024). click image to enlarge it

Notice the advertisement highlights that stock markets are volatile. And they actually discourage investors from “subjecting your money to the stock market.” Hmm…let’s see. Don’t subject your money to the wealth generating power of the markets. Take the last year, two years, five years, ten years etc… The markets over time, for the long-term investor, have created significant wealth for investors. For the long-term investor we should be subjecting as much money as possible to the stock market.

But this is a bank’s short-sided marketing department. We get it. But this is what investors are seeing, and it is reinforcing the false definition that safe has to do with not experiencing temporary nominal losses.

A Recent Unfortunate Experience

I was recently meeting with a wealthy and very astute individual when it came to his business and real estate. But not the market. I learned that he pulled over $1MM from his 401k during the CoronaCrash and it is still sitting in cash. Actually, as he proudly stated, it is yielding 5%. He is at least 10 years before retirement. But he pulled it because he couldn’t stand seeing the value go down so much. As he stated, he had never lost that much money (in dollar terms) and it spooked him.

I shared some hard truths with him, including literally saying, “you shot yourself in the foot.” I didn’t go so far as to calculate how many hundreds of thousands of dollars this mistake cost him. I pivoted to discuss how he can get back in because he needs to at some point. After all, this isn’t about his retirement date. This is about his death date, which means his retirement has a time horizon of 30+ years. I have no clue what he will do. The easy thing is to keep the status quo (aversion of regret), but it will be a financially very costly decision. I have no clue if this guy will go with me – probably not. But it is most important to tell the truth and let people decide which reality they want to live in.

The Hard, But Necessary Truth

Part of our jobs as advisors is to be truth tellers. But people don’t necessarily want the truth, they want to hear what they want to hear. And unfortunately, there are many in our industry who are happy to do just that – so they can continue collecting the fees. But we need to fight against what “safe” actually means because it is not about savings accounts (unless they need the money within the next three years).

What is safe in investing?

  1. Having a diversified portfolio based on a personal plan containing assets that fluctuate wildly in value over the short term, but have generated significant wealth over time
  2. Having a time frame of more than a few months or years. The longer the time horizon (both when they need money and how frequently they will evaluate performance) makes it safer to be an investor
  3. Relying on professional advice and a plan to guide their decisions, not a headline, financial ad, or the emotions of the day


(c)2024 Behavioral Finance Network