The biggest risk to our wealth

In a a session this morning, we were talking about how people spend their time watching shows like Dancing with the Stars and I was saying how I have better things to do with my time. We then went onto what those things are and I stepped him through my blog, saying that I'd far rather spend an hour or two writing, than watching people who can't dance, try.

I showed him the post on my Splinterlands purchase from last night and the picture of the card caught his eye and he inquired about it. After explaining and showing what it cost, he just couldn't wrap his head around it, because of all the risk involved.

However, it is funny how we talk about investment risk concerning money, but don't actually acknowledge that we are surrounded by risk all of the time. Eating a bag of candy a day is only going to cost 2€ in money, but what does the risk profile look like from an investment perspective? Obesity, thinking and decision-making degradation, self-esteem and confidence issues? These might not all be incurred at the time of eating, but the potential for them is high. Smoking is the same, crossing the road, taking a shower, driving on the highway - everything comes with risk attached, including the way in which we spend out time.

While the risk of investment seems to hold people back from investing, the biggest risk to their money is probably not risking it. This might seem conflicting and counterintuitive to some, but most should know, idle money is, losing money. If it isn't generating beyond the inflation rate, the purchasing power is going down and thanks to the poor fiscal policies taken to deal with Corona, rapidly increasing inflation globally is going to erode much of the value that people feel they have gained, without "costing" a dollar.

A hundred dollars a year ago is still a hundred dollars today, but what that can buy is worth less than a hundred dollars. Even the current ATH value of Bitcoin is a lie of some sort, as for example, the US has an inflation rate of 6.2% over the last 12 months, which means a $69,000 Bitcoin, is like having 65,000 to spend a year ago. One Bitcoin is one Bitcoin, but what it can purchase is going to change also.

From a psychological perspective however, it is interesting to consider how people have such an adverse reaction to monetary risk exposure, yet have almost no reaction to debt exposure, without realizing that they are essentially the same thing, except what is bought for an investment and what is bought on a credit card, generally have a different financial lifecycle. I used the example of a TV last night, but a car is something that people often by on credit too.

People pay 40K for a car and 4% interest a year for 5 years, ending up paying around 50,000 for the car and by the time they "own it", the value is more around the 15K mark. That is a risky investment, yet people seem to be quite happy to make it, many times in their life. However, many of the same people say, "I don't have enough to invest with".

Even if they still bought a car on the same deal, they could get one for three quarters of the price and have 10K more to spend using the loan money, which is facing a 4% interest rate. That means that they would need to beat the interest and the inflation rate, which requires getting more than about 10% at the moment, but they would have a 10K "lump sum" to invest into something.

That is too risky!

Yes, it is risky, but maybe not as risky as first thought, because after 5 years, the 50K spent on a 30K car has a car that is worth 10K, which is only 5K less than the 40K car, but the 10K has had five years of investment potential. If on average that 10K is able to earn 15% per annum and is compounded across those five years, at the end it will have a value of 20K dollars. This means that while the 40K car lost 35K dollars, the 30K car lost 20K dollars and of course, inflation is applied to both.

However, if instead of 5 years, we kept the car for 10 years, the 40K car would be owned after 5 and at 10 be worth about 5K. The 30K car would be owned after 5 and be worth maybe 3K after 10 years. However, the 10K loan invested for an average 15% yearly gain compounded (yearly), would be worth 40K - *the purchase price of a new car, though with inflation, it would be the equivalent of the 30K car from ten years ago.

Well, perhaps I lied. The biggest risk with money isn't leaving it idle, it is spending it on consumables that diminish in value, yet don't necessarily bring much of a difference in experience to the table, for example, a 40K car instead of a 30K car.

I am not suggesting people take additional loans to invest with however, because most people buy the highs and as such, are likely to lose. However, if having access to very cheap loans in the lows, take a little "risk" is probably the least risky thing a person can do at that time. For example, I asked my wife if we could spend some of our renovation loan in March 2020 to buy two Bitcoins - she said no, because it was too risky. That would have been 7000 to purchase on a loan that has a very low interest rate capped for teen years and today, it would be worth 130,000 dollars. What the risk would have been, is that we lost it completely and would have had to wait a bit longer to collect the money form our salaries to do some part of the renovation. In hindsight, she realizes her error, but I had to have her approval for this kind of purchase - as far as our relationship is concerned.

Risk is interesting for me to think about in these terms, as what it is actually playing on are our various fears of loss, looking like fools and missing out on other opportunities. We have been conditioned to live in a society that sees taking a loan for a car is not a financial risk, but investing into something with potential generative value is. This conflict in concept seems to be more pronounced the lower we go on the economic spectrum of wealth, with the wealthy being far more risk-seeking than the poorer cousins.

Some will put this down to having the security of enough wealth to spend, but that is only part of the reason I believe. A larger part is that a lot of people is because they do not understand how their minds play tricks on them in what is valuable or not and how they think that because they don't have a lot to go in with, they can't make significant gains. Yet, they still buy that car on finance.

Crypto is opening up the possibility for the least fit to invest into the traditional economy, to invest into the future economy using amounts that would seem insignificant anywhere else. Times are changing and those who start to understand their fears surrounding money, their mindset around risk and investment and can find ways to generate even small inflows of value to build their wealth, will find that in the not too distant future, they will be far better off for it.

But, this is opt-in and very few are willing to spend their time learning how they can participate more actively in the economy, while they sit down in front of the TV and watch stars do something they aren't very good at for entertainment.

The biggest risk to our wealth, is us.

Taraz [ Gen1: Hive ]