Dear Happy Investor, how can you invest with certainty? Is this possible at all? In this article you will find explanations from multiple perspectives on how investing with certainty is possible. For example, we first cover 6 possibilities for inspiration and explanation. Then we look at ways to invest with some degree of certainty (so higher risk), with the chance of higher (than average) returns. Finally, we finish with three truths to increase your certainty of return, regardless of your investment strategy.
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What does investing with certainty mean?
I am regularly sent the question, "Can I invest with certainty? The only way to invest with certainty is to be sure that the amount invested will pay off in the long run. A pessimistic risk controller (or is this a pleonasm?) would say: 'Nothing is certain! Not even the savings rate on my bank account!'
In this case, the best lady or man is right: investing never comes with 100% certainty.
At best, we can speak of "very much certainty" and "very little certainty." Investing, is in fact a calculation of probability. Moreover, capital return is linked to certainty (risk).
A government bond provides a high degree of certainty of repayment. Because you have little risk, the reward is also very low. In contrast, investing early in a small growth stock offers very little certainty, but potentially high returns.
A company with 100 million in sales may go bankrupt sooner than a company with 1 billion in sales, but this company may grow more easily and thus offer higher returns.
Thus, within our stock research, we also look at higher-risk stocks, because they can potentially provide high returns over time. The low level of certainty is a disadvantage, and therefore you also need a good investment strategy.
However, this is important: to become financially independent you don't need to take a lot of risk. It's about holding on to the right composition of assets for a long time and maintaining it in a disciplined way. You can learn the first one, but not everyone can maintain the right discipline.
Investing with certainty: 6+ possibilities
Investing with certainty implies that we know with a high degree of probability that there will be a positive payback. We base this expectation on possible impact of risk factors. This may be, for example, that the investment will yield X euros every month. This could be that the investment can't result in a price loss, and is likely to increase in value over time. Or it could be that the investment leads to lower costs, which is the highest form of certainty.
Below are some options for how to invest with certainty. They are listed in order of more to less certainty.
1. Paying off debts.
The highest form of investing with certainty is paying off debt. If you have to pay 5% less interest every year, that is exactly the same as 5% return.
Now I hope you don't have any money loans barring the mortgage. If so, pay it off immediately. This is the highest priority. Not only in terms of certainty, but also in terms of mental health.
Then the question is whether paying off mortgage is smarter than investing. However, this depends entirely on your risk profile and the amount of the mortgage. From a financial point of view, it is usually smarter to invest.
2. Investments with a fixed payback period
Investments with a fixed payback period are the second best way to invest with certainty. Think about energy-saving technologies, such as solar panels and insulation. Suppose you buy solar panels. With today's energy costs, the payback period is 7 years. Now energy is getting much cheaper for a long time. The payback period decreases to 10 years. However, the other way around is also possible.
Either way, sooner or later this investment will pay for itself. The "risk" is only: how soon?
For a rational investor, this is a relevant question. After all, if I can achieve a 5% return on solar panels with 90% certainty, it might make more sense to achieve a 10% return on the best ETFs with 75% certainty.
3. Government Bonds
Western European government bonds are almost certainly repaid (but not 100% certain). Government bonds offer a high degree of investment certainty. However, the return is (too) low (at present). Other types of government bonds are also possible. From a loan to President Erdogan to corporate bonds. Of course, this reduces the certainty.
4. Airbnb your home
More out-of-the-box: with a small investment, make your home ready for Airbnb rental. Let's say it costs $10,000. After 200 nights at $50, you'll recoup that amount. With an occupancy rate of 20%, you'll realize 73 rental nights per year (365 days * 20%). The payback time is therefore < 3 years.
After 6 years the total return is €21,900 (excluding variable costs). That comes down to an average return of 14%! Even at a lower occupancy rate, the return is high. You just have to want to rent out your home....
5. Diversified investments with fixed returns
Diversified investments with fixed returns offer more certainty. Think of funds with a large spread in assets that pay a fixed dividend. For example, you can invest in real estate funds with the 1st right of collateral. Should the owner, for whatever reason, be forced to sell the property, you will be one of the first to receive money (as a creditor). Of course, the higher the certainty, the lower the return. This varies from 4% to 8.5% dividend per year.
6. Buying real estate (with a lot of equity)
A final option for investing with (some) certainty is to buy real estate. Real estate investors swear by taking on a lot of debt. This indeed makes financial sense, although it has high risk. In my opinion, this is acceptable if you buy one real estate property and ensure that you can always fund the mortgage burden in case of vacancy. In this case, maximizing debt makes sense. Especially at low interest rates.
However, from a risk perspective, it is better to buy property with more equity. The mortgage burden decreases. And with the right purchases (Value, location, ...), there can be possible value appreciation.
Read all about investing in real estate here.
Can I invest with certainty and high returns?
It is not possible to invest with certainty and achieve a high return. However, it is possible to achieve a higher return with an acceptable higher risk. This has been proven by the Modern Portfolio Theory (MPT) of Nobel winner H. Markowitz. The bottom line is that we can achieve higher, but average, returns with some certainty thanks to a proper composition of assets.
The only way I know of to achieve higher than average returns with more certainty is on the basis of very good research. This is not an option for novice investors. They are better off investing according to the Modern Portfolio Theory (read: a lot of spread in assets).
What is investing with certainty? Suppose you know a company like no other. You know that this company is actually worth much more than the current share price. Is this a form of investing with certainty? After all, if you are right, the market would eventually seize this opportunity. The stock price goes up. And you have a high return.
This is what they call (deep) Value stocks. A situation where you invest in companies that are well below its intrinsic value. The risk is minimal, because the company is worth a lot more than what you're paying for it now. And to mitigate the individual risk, you need to create a portfolio of (deep) Value stocks.
One of the best ways to do this is with commodity companies. If you want to know more about this, read this Capitalist Exploits review. I have had very profitable experiences with this for many years.
How do you get more certainty with investing?
There are a number of ways to invest with more certainty. This is something I've been working on for years, given that I strive for financial independence. The exact strategy of how I achieve this (which is why I am now financially free) can be found within the Happy Investors courses. My strategy focuses on sustainable high returns. This means to achieve higher returns with more certainty.
After all, anyone can invest with 4% annual return. But not everyone can invest with 10% annual return (or higher). My strategy relies on the latter, but with acceptable risk.
In general, there are three key elements to investing with certainty.
Diversification leads to more certainty when investing. Diversification means investing in different assets. In particular, consistency in relation to low or negative correlation is important. You also need to diversify into different types of risk classifications. Take equities as an asset. Investing exclusively in high-risk small cap stocks is not necessarily the best choice, just as investing exclusively in low-risk large cap stocks is not.
2. Long term
The longer the time horizon, the more likely it is that you will realize higher returns. There are a number of factors that work in favor of the long-term investor. First is the compound interest effect. Second, and this is something people don't often think about, a longer time horizon gives you more room to make mistakes. As long as you don't make catastrophic mistakes, you can make a profit in the long run.
With knowledge you can make the difference. As indicated, anyone can achieve 4% return per year. But not everyone can achieve 10% over the long term. With the right knowledge, you can even achieve higher than average returns, as with the shares we research. And not just with stocks. It's also a matter of choosing the right ETFs. Or buying the right real estate properties in the right locations. Knowledge is power. Knowledge makes you rich.
Questions or comments about investing with certainty? Ask them in the comments below!