Even the most brazen and devil-may-care investor would do well to make some safe investments. After all, we never know what might happen from day to day, and investing even a small portion of your money with caution and care can mean the difference between a comfortable cushion and holding a cup on the street.
A portion of the funds of any investor must be placed in safe, although relatively low yield, opportunities. This precaution is taken so as to safeguard a portion of the fund in case the more risky investments should run into trouble. It is taken for the additional reason that opportunities present themselves from time to time, which can be taken advantage of if there is ready cash available on short notice. Very often excellent opportunities present themselves unexpectedly, and ready cash is the only way to profit by them.
In almost any investment there should be collateral, which is held by the investor. In the stock market the investor owns a part of the company, and this ownership is evidenced by the stock certificate. If he buys a bond he has evidence of a debt of the corporation on which he can foreclose if the corporation cannot pay. If he finances the purchase of a house or the renovation of a house he should have a mortgage, either a first or second mortgage, which means that if the home owner cannot pay, the investor can take over the home through legal proceedings. If funds are lent which enable the borrower to purchase, let us say, a mobile home or a boat, the investor should keep title to the mobile home or the boat until it is paid for in full. This title is in the form of a conditional sales contract, which says that until the object is paid for in full the investor owns it. Only then does the title pass to the borrower.
Wherever possible the investor should have the guarantee of some other person or organization insuring that the lender will be paid. This guarantee is known as recourse. Where a dealer sells a customer a mobile home the dealer should guarantee that the investor will be paid. If the customer does not pay, the dealer must immediately pay off the entire sum due. Such a guarantee is not always possible to secure, but it is highly desirable from the point of view of further safety of the investment.
Paradoxically, high yield insures safety. It insures safety because it provides an excess of income against which losses can be charged. Some of the highest yielding investments in the country are small loans (although these are not suitable for the individual investor). Every month the financial institution holding small loan receivables writes off its books loans which have defaulted or are uncollectible. These are admitted losses, and they are anticipated; but the high yield of the receivables allows these losses to be written off and still a generous profit to be secured.
If, for example, an investor has $200,000, he can invest it in a savings and loan association at 4 percent and receive annually $8,000. If, on the other hand, his higher yield investment program allows him to realize 10 percent instead of 4 percent, he receives annually $20,000. He can afford to lose $12,000 a year in bad loans and still be in the same position he would have been in had he kept his money in the building and loan association.
As an investor you're going to have to hedge your bets, but it's wise to do some analysis before you dive right in. A well-balanced portfolio can save you and your family a lot of worry and grief if some of your riskier investments don't pan out. Don't let one windfall go to your head -- it's been proven time and time again that the safe investor is the smart investor, and the risk-takers often have the farthest to fall.