We all love speculative investments that promise high rewards with relatively low risk. Many have moved funds from safe investments into speculative investments in the quest for higher returns. Many have got their fingers burnt in the process. Those who succeeded tend not to rebuild their depleted reserves, taking more risks that eventually backfire along the line.
I attended a training for officers of Cooperatives today, where the risk of wiping out one’s reserves in speculative investments was highlighted. I found it very interesting how the issue of governance and asset allocation was stressed for organizations while individuals scarcely pay attention to it.
In a Cooperative, though you have savings, you are not allowed to draw down on your savings for loan purposes. You are given a loan in proportion to your existing savings. This means rather than wiping out your savings or reserves to invest in a higher-risk venture or project, you are advancing a loan. You repay the loan over the agreed term while building your savings side by side. That means you get to grow your reserves side by side with running your project rather than wipe out one to fund the other.
Start with building your reserves
To be able to invest in speculative investments, you need to build your reserves first. This does not mean saving money in the bank. It means putting the money to work in zero / low-risk investments out of view. As seen above, this should be a continuous process arising from cultivating a savings (and investing) habit.
Profit-making organizations retain some of their profits as reserves. These are organizations that plan to weather future financial storms. The bigger the reserves, the bigger the storms they can weather. This includes speculative investments that go wrong. That means the bigger your reserves, the greater your capacity to handle risk. When you can afford to lose the money, you can be more daring. Depleting your reserves puts you in a weak position, especially if you lose your job or suffer a business downturn.
The best time to build your reserves is when things are going well. The best time to prepare for war is at the time of peace. The more troops you have, the bigger wars you can undertake.
Having strong reserves is as important to nation-states and organizations as it is to individuals. That is why it is important that before you embark on speculative investments, be sure that you have your back covered if things go otherwise.
