Last Updated on October 9, 2020
Summary ↬ Don’t get lured by all the quick money-making techniques you see online. Every investment that bears significant returns is risky, if you do your work you will manage the risk to mitigate loss. Don’t put all your eggs into one basket, seek assets diversity. Fund managers, bank advisors underperform largely because of their fees. Owning your own business would result in a steady long term returns. Invest wisely.
What is the best investment for someone with limited funds?
First, stay away from all “get rich quick schemes pitched to you online!”
Read a few good investment books like those of Graham & Dodd for stocks or Think Like A Tycoon for real estate.
In investing, if you take a big risk and are diversified, you will have big returns, but only if you are sensible and know what you are doing.
On a “no-risk” investment (sovereign bond) you will have a guaranteed big loss after adjusting for taxes and inflation. The theory of the unwashed public and their foolish investment advisers is slightly different.
If one invests in the most safe, non-risky conservative things like high-quality government bonds, you will have a dependable, but smaller gain at the end of the day. Maybe in these days of minuscule interest rates even the foolish people don’t believe that so much anymore.
I know from experience that this standard theory is and always was all wrong.
Why? Because there never was a guy in the sky who decided infallibly what was risky and what was not risky.
Not only that, the majority of stockbrokers, hedge fund managers, bankers, and all the usual investment gurus were/are usually wrong.
I say usually because as in gambling, there are always a few who have lucky streaks. “The trend is your friend until it ends.” That means you pick up a few coins until you get run over by a steam roller.
Seriously, overall, most funds and bank advisors (past, present & future) under-perform even the Benchmarks (i.e. averages) largely because of their fees.
In my opinion, then and now, something generally considered risky by the general public can give a super high return, very dependably.
Theoretically “super safe” investments could deliver a 100% loss, especially if leveraged.
When looking at bonds, a diversified portfolio of so-called high-risk junk bonds have almost always in any year, delivered a better overall return than so-called low-risk sovereign (government issue) bonds.
Thus to me, high-risk investments were actually low risk. So-called low-risk sovereign bonds these days are actually delivering a guaranteed loss, net after inflation.
Let’s look at a few more examples.
When Jackie Kennedy, widow of the USA president got a huge divorce settlement from Onassis, her 2nd husband, she invested most of it in “safe” New York State Muni Bonds.
They had a great tax free yield at the time, 9% I think… For years they were considered risk-free.
Then NY State defaulted on the bonds. Jackie was nearly broke.
The same thing happened years later with Argentine Sovereign Bonds. The investment community considered them relatively safe and risk-free. But Argentina defaulted. So much for low risk.
The rating agencies Moody’s, Dow Jones, A.M.Best, etc. are often very mercenary and too often, very dead wrong. Why? Because they are paid by the companies whom they rate.
All too often, the more they get paid, the higher they rate lousy companies and their securities. To me, this means that sometimes the AAA ratings they give are in La La Land—quite unrelated to the real risks involved.
That happened with the high triple-A ratings given to AIG when they were insuring sub-prime loan packages in 2007-2008.
Next Topic. My Theory.
When you know what you are doing, so-called risky stuff will always safely yield the best returns. Being highly leveraged (in other words, borrowing huge amounts, like more than 100%) to do deals is always considered risky by those who believe in the “Risk/Reward Ratio.”
Usually, borrowing does add a lot of risks. However, I personally didn’t consider it risky when I bought a property in a real estate market that was then rising (with justification!) 3% a month.
There were good reasons: supply and demand. Silicon Valley was creating jobs and vast amounts of new wealth. Housing and commercial space were both in short supply.
An additional bonus for me was in that particular market both then and now there was essentially, no personal liability on mortgage loans.
The Risk-Reward theory may work well in a gambling casino wherein roulette, for instance when a “conservative” bet is on red or black. There is only a 53% chance you will lose all your money on one bet.
If you win, you double your money. On a single number, roulette bet there is a near 97% chance you will lose.
Yet the “reward” is that IF YOU WIN, instead of even money, you would get back $36 for every dollar bet.
Please don’t quibble with me over the exact odds. This is about right. It depends on house rules, how many green zeros there are on the board, and a few other factors.
The point is, in casino gambling, you can figure out the exact odds. A very risky bet 36/1 does indeed pay off better than a 53/48 bet.
With stocks and securities, it isn’t the same. There is always the risk of a “Black Swan,” an event nobody expected or could have predicted.
Thus to answer the question, “What to do with my limited funds?”
Forget the theories of Economists and “commentators” on television. Forget the garbage predictions on the internet and most newsletters. They don’t know what they are talking about. They usually have dismal personal investment track records.
What should you do? Look for and find sensible deals in the Graham and Dodd analysis mode. Do the best you can.
Don’t expect to average more than about 10% a year. The best thing to do?
If you want any chance of becoming seriously rich, get into your own business. Use “other people’s money.” Trading, arbitrage, or delivering goods and services.
You won’t make much with passive investments.