Sure thing investments that are completely risk-free and guaranteed to make money simply don’t exist. All investments carry some degree of risk. However, some investments may seem like sure things but end up losing money. Investors should always conduct due diligence and avoid getting caught up in investment manias where assets become overvalued. Although no investment is a sure thing, diversification and avoiding excessive risk can help generate more consistent returns over the long run.
Past alleged ‘sure things’ have ended badly
Throughout history there have been many supposed ‘sure thing’ investments that eventually went bust. In the 1600s, tulip bulbs were bid up to astronomical prices during the Dutch Tulip Mania before collapsing. In 1929, the U.S. stock market reached a permanently high plateau shortly before the Great Depression bear market began. During the late 1990s dot-com bubble, tech stocks with no earnings were touted as can’t-miss investments. And leading up to the 2008 financial crisis, real estate prices were widely believed to have minimal downside risk. Investors must remember that trees don’t grow to the sky and asset bubbles eventually pop.
Market manias distort perceptions of risk
During investment manias and bubbles, the perception of risk becomes distorted. As asset prices rapidly climb higher, investors rush to join the crowd bidding up prices instead of asking tough questions. Warning signs are ignored and a belief emerges that it’s different this time. The investment becomes seen as a one-way bet or sure thing. In reality, trees don’t grow to the sky and speculative manias always end badly. Investors should avoid getting sucked into the herd mentality and maintain a balanced perspective on risk.
Diversification helps reduce risks
Since all investments carry risk, diversification across asset classes, geographic regions, industries, and individual holdings is critical for risk management. Spreading investments out helps smooth out volatility so the portfolio isn’t reliant on just one or two assets for the bulk of returns. Having a balanced portfolio with fixed income, equities, cash, and alternative assets makes it less likely that any single investment can sink the overall portfolio. Diversification allows investors to participate in upside while minimizing downside risk.
Avoid excessive risk from leverage or derivatives
Using leverage like margin debt or employing complex derivatives strategies can turn normally solid investments into dangerous speculations. While leverage can amplify gains on the upside, it also magnifies losses on the downside. And with derivatives like options, a small adverse move in the underlying asset can lead to substantial losses. Investors should avoid excess leverage and only use derivatives if they thoroughly understand the risks. Concentrated bets should be kept to a minimum within an overall diversified portfolio.
In investing there are no sure things or guarantees. But investors can reduce risk through diversification, avoiding manias, and limiting leverage. Although no investment is risk-free, a prudent approach focused on the long term can help lead to more consistent returns.