Investments That Feel Safe May Not Be

People behave less cautiously in situations where they feel safer or more protected. However, the point is that what you feel is not what is real.

The issue at stake is twofold. For an investor, you can feel safer than you really are with a particular investment, but a broker can also feel safe – rightly or wrongly – because they think they can get away with taking risks with somebody else’s money. These are two sides of the same coin; they are interrelated but not the same thing.

Some investments may be deliberately (and less frequently) presented as safer than they really are. Investors who want to believe the publicity and are tempted by promises of high returns may fall for it, or they may truly not know any better. After all, it is not their job to know that they are being given bad advice. In practice, a fast-moving market can move past the stop before you know it, and if the stop is too high or low, or never gets changed, it’s not very effective either.

Guarantees always cost money, such as in higher costs or lost dividends. Also, some guarantees are very limited and may simply not apply when you really need them.

There are the Securities and Exchange Commission (SEC)  and courts, which are all theoretically there to help you if your investments go wrong. Self-regulatory bodies like the SEC are frequently accused of not really being objective or fair. There are constant allegations of ignored evidence, a refusal to investigate properly, illogical decisions and so on. Their presence in the investment world most certainly does not justify taking excessive risks. It is often prohibitively expensive to take a broker to court, and no matter how sound your case, it can still go wrong.

Conclusion
Risk is at the heart and soul of investment. But risk compensation theory tells us that safeguards are not all that safe, and may simply make people more risk-friendly. Many forms of protection against risk are more illusory than real. The solution is to make sure that you do not let a little bit of protection sweep you away into the land of big losses.