Risk Versus Return: How You Can Find the Right Balance

Over the weekend, I had a lovely chat with a fellow financial publisher from Auckland.

Among other topics, we discussed New Zealand’s up-and-coming trends with the best investible potential. Eventually, we ended up on that dirty word — cannabis.

My peer reckoned that the Kiwi market wasn’t ready for something so radical, so challenging, so divisive…

He suggested that, to most, the fact that cannabis has ethical implications will be enough to prevent them from wanting to dabble in the new market.

As investors — and also generally as a population — Kiwis are conservative, he stated.

That surprised me.

You see, while I’ll be quick to tell you that I’m no master of money…no economic expert…no sage of the stock market…I do feel moderately capable of talking business ethics.

I have a master’s degree in that area specifically, after all — whatever that counts for.

More importantly, my bearish slant on investing naturally drives me towards conservativism. You gotta be when you think the world could end any moment, right?

And how many young investors would invest in gold bullion? I did.

And how many American investors with full access to exciting exchanges like the Dow, NASDAQ and S&P would consider timberland a solid investment? I do.

And how many registered financial advisors would lean towards holding on to some cash? I would.

In that sense, you’re talking to one of the most conservative investors out there…

So, when the publisher suggested that Kiwis are conservative investors, either in terms of portfolio risk or ethics, I was dubious.

You’ve got Kiwis out there right now buying houses…in this market…at the peak of a widely-acknowledged bubble.

They’re betting on ultra-low-odds against economic theory, historical cyclical movements and basically every pundit with half a brain — that the housing market will stay inflated over the next 30+ years.

If that’s not risky investing, I don’t know what is…

At the same time, if you look at the cannabis market, you’ll find heaps of research to back up the claim that it could likely provide substantial returns for early investors.

But I get it — property is traditionally perceived as being ‘safe’, at least in New Zealand (where I’m from, not so much).

Over the past 40 years, New Zealand property has been a good bet, especially for folks like Paul who bought a house in St Mary’s Bay for just $164,000 and held on until today…

He’s now sitting on a valuation of over $2 million…and around New Zealand, there are many more like him. That’s an incredible return, but with it comes significant risk.

Unfortunately, in the investing world, risk and return are ruthlessly intertwined.

Like Simon and Garfunkel. Batman and Robin. Fish and chips.

You can’t get one without the other.

And, right now, there are loads of homeowners who think they’ve slipped the reins of the laws of economics and gotten the world’s very first ‘free lunch’.

Well, I hate to break it to you, but Kiwi homes are ticking time bombs. They’re the product of homeowners essentially going double-or-nothing every year for the past decade.

That is, of course, if you put any credence in that thing called ‘statistics’.

So, when my publisher friend suggests that Kiwis are too conservative for something like cannabis investing — or even stock investing at all — I must disagree.

It’s not that investors are conservative; they’re certainly A-OK with taking on an incredible risk in housing.

Rather, why would anyone put $100k into some slow-growth stock when the New Zealand housing slot machine has hit the jackpot every year for 40 years?

While risky, it’s a natural impulse to get on the winning team’s bandwagon.

I’d suggest that this house of cards will topple soon…followed by a bearish sentiment across the market as homeowners blame the economy…followed by a resurgence of interest in stocks and bonds.

I just hope that a few forward-thinking investors manage to jump ship before housing sinks…and before certain stocks — like cannabis — shoot for the moon.

It’s just a matter of time…

Back to the ethical side of the argument —some folks will refuse to invest in cannabis companies because they’re against it ethically.

I have absolutely no problem with that. Put your money where your mouth is. Follow your beliefs.

That’s one of the best things of being a self-managed investor — you have full choice over where your savings go.

I’d be just as supportive for those who choose not to invest in alcohol companies…

Or energy companies for their role in climate change…

Or defence manufacturers for their part in fuelling wars….

Or financial firms, especially if you’re an Aussie…

The point is, every purchase you make has ethical implications…whether it’s stocks, houses or your morning can of L&P.

Like risk and return, consumption and ethics are forever intertwined.

What you, as a consumer, need to do is determine your line in the sand…and see how your consumption falls in relation to it.

Best,

Taylor Kee
Editor, Money Morning New Zealand

PS: Have you ever had an ethical conundrum when investing? Have you found it difficult to weigh the good and bad of a financial decision? If you have, and lived to tell the tale, I’d love to hear about it. Reach me at letters@moneymorning.co.nz


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Money Morning NZ: Stock Market News, Finance and Investments