Investment Lessons from Jack and the Beanstalk

Recently I met a woman who told me that her husband just cashed in their entire 401(k) of about 36,000 and bought gold. I looked at her as her three young children tugged on her arms and legs and nearly toppled over their very pregnant mother. “Crazy, right,” she laughed. I tried to smile and said something like “could be risky”, but inside I was thinking…well, probably the same thing you are thinking. At least I hope we are on the same page.

I’m not going to debate the value of gold in this post. Many people are convinced that gold will hold strong and are willing to ride the bubble for as long as they can. What I do want to emphasize is that any investment carries risk–always has and always will.

The #1 step in investing is understanding your risk tolerance.  Jack, of Jack in the Beanstalk, taught us that one. Jack risked his life to climb the stalk, but at that point he didn’t have much to lose. It was just him and his mother. They had no money and no means. If he died climbing the stalk, at least he would have had an adventure. If he didn’t climb it he’d still be poor, hungry and his mother would probably kill him anyway for trading the cow for some beans. His tolerance for risk was high.

Upon reaching the castle Jack went through several investment choices. He decided to go for a short-term payoff that would give him immediate wealth. But once he came down from the bean stalk, he knew that it would take more than a few pieces of gold to get his life on the path of financial security. So, he went up the stalk again to teach us the 2nd lesson of investing–diversification.

Maybe as kid you thought Jack in the Beanstalk was all about greed. I know I always thought that the Giant had too much and so, he got what was coming to him. But, the Giant wasn’t actually that bad. He also knew that the keys to his wealth were in diversification. He had piles of gold, a hen that layed golden eggs and a magic harp. What the Giant didn’t know is that it could all be gone, quickly, at any time and he wasn’t prepared for that devastation.

I have no idea what the intentions were of the husband who cashed in the 401(k) for gold were. Is he planning on holding gold for the long-term or is he trying to make a profit then grab other investments? I don’t know. Gold has been trading high for quite some time, and many people believe that gold will always retain value. Though this may be true, does simply retaining value qualify gold as an investment? Many investing experts, who know much more than I, are cautioning that gold is riding in a bubble, and there is no way to determine when it will pop.  The price of gold is still high, but did drop sharply just after I met this woman. I wish them the best.

To understand your risk tolerance, you need to think about what might happen if you lost your entire investment. Of course, that would be bad, but would it be devastating? Who else would be affected by your investment choices?

Spreading your assets among several different kinds of investments reduces the chance that you’ll lose everything. And, though these sound like basic or even easy guidelines, there not always easy follow. That’s especially true when an attractive investment comes along, like gold. Sometimes it’s hard to be objective.

P.S. For a perspective on gold investments J.D. Roth of the blog Get Rich Slowly wrote a well-researched post back in May that also includes his personal experience. Good reading.

To get an objective view of your wealth management come talk to our financial advisors Thomas P. Valdez Jr. and Nelisha Firestone .
photo by jepeters74


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