The Risk of Not Investing
Doing nothing can seem like such an elegant idea. After all available options have been thoroughly analysed and no appealing solution seems to stick out, doing nothing could be a very smart thing to do indeed. So how about applying this mantra to the current situation where interest rates remain low, riskier assets have made tremendous gains and geopolitical risk is ever present. Should the investor do nothing at the moment?
Well, as always, it depends on what doing nothing means in practice. Do we keep what we have? Do we sell everything to reduce risk and move into cash? Do we buy money market funds or short dated government bonds? Which currency? Herein may lie the conundrum of our times: doing nothing actually means a lot of things these days, and seemingly doing nothing actually means doing something.
But enough with the word play. The fact is, that doing nothing has always carried with it an opportunity cost. And the question we have to ask ourselves is, what is this cost and does that represent good value? For instance, putting money into the bank yields next to zero in gains these days. One alternative is equities, which have rallied more than 17% this year. Then there are hedge funds, some of which have done extremely well. Real estate has also been a tremendous investment – particularly in big cities where gains have been spectacular. And what about inflation? Doing nothing, and therefore earning nothing, means we actually lose money versus our eroding purchasing power.
The answer to this riddle lies in the assessment of risk. Many astute investors may believe that all of these gains can quickly disappear and worse turn into losses, then doing nothing is a really appealing option. But we don’t know when these risks come to bear and, as such, doing nothing can also be very expensive.
All in all, doing nothing seems to be a very complicated affair.