Levels Of Security For Investments

By Brian Bloch AAA

At a bike shop, I recently picked up copy of the catalog from the German bicycle accessory manufacturer Trelock, which is well-known for its range of locks. Much to my surprise, I immediately noticed a compelling parallel with investment suitability and portfolio risk levels.

The Three Main Categories of Security
Trelock divides its broad assortment of bike locks into three main categories, which it also subdivides, and each subsection contains a number of different locks. The three groups are as follows - one and two, "during the day, short periods" (protection against petty criminals/sneak thieves); three and four, "during the day and a few hours of the night" (high protection against petty criminals/sneak thieves); and five and six, "overnight and long periods" (high protection against professional thieves). The prices range from about $20 to $100.

Suitability
These three categories clearly parallel high, low and medium risk levels for investments. And the many different locks within each category are like the multitude of funds available in the investment markets. Furthermore, the brief descriptors in the catalog are essentially the same principle as suitability. If you don't need (or want) all that much security, you can go for a basic lock (levels one and two), if you want more security, you need something more elaborate, and if you really want to sleep easy, go for the top level (levels five and six).

To use a metaphor, say that you lock your bike with a $20 lock; a thief can probably cut off your wire lock with heavy-duty bolt cutters, and a basic lock can also be picked with relative ease. It is really up to the users to decide what they want to risk. The cheaper locks are lighter and easier to use, but they are not so secure - so it is with investment suitability. You can take a chance with a not-so-safe investment, and it may work out all right, but you may also lose money. The real point is that some locks are intended for and suitable for some purposes and not for others. If you really don't want to or cannot afford to lose money, go for a secure investment such as government bonds, but if you are not so concerned, stocks could be fine and may earn more, especially over time.

Furthermore, just like with financial products, your "appetite for risk" can also determine how much you are willing to pay for peace of mind, and how much trouble you are willing to go to.

Other Parallels
Interestingly, Trelock stresses the length of time you will be leaving your bike exposed to the elements. The longer the duration, or the more valuable the bike, the more securely you would want to protect it. With money, the more important it is to you, the less risk you want to take.

On the other hand, the longer the time frame, the more time you'll have to ride out downturns, and thus, the greater the time horizon risk. However, no amount of time will protect you from a dud investment or a really serious thief. And the longer your bike is exposed to the elements, the rustier it will get, just like inflation eating away at your money.

Also, the guy at the bike shop pointed out that while the number six top model is extremely secure, if someone takes your bike away in a truck and works on it using the right equipment, then that person can eventually break open anything. The parallels between Internet banking and various other dubious, complex or nontransparent investments, are clear enough. Nothing is totally safe, but some investments and accounts are a lot more reliable than others.

One big difference between real world locks and investments is that what you see and hold in your hand is what you get. At the store, I held the various models in my hand and examined the safety features. I really noticed how much heavier and sturdier the more expensive models are. Investments, however, tend to be promises made on pieces of paper, with legally binding agreements that you cannot weigh in your hand. As a result, far more can go wrong and far more caution is required.

The lock parallel is much like that of buying through the Internet, where you can only see a picture of the lock and read what people say about it. That is very different from holding it in your hands and checking it out yourself. Indeed, I did once buy a bike lock through the Internet and found it to be far too big and clumsy for my purposes. I would never have bought it in a real store after examining it physically. This is something you can never do with investments, apart from real estate, but that too is a lot more complex and multifaceted than a bike lock.

The Lessons for Investors
Your savings are very important to you, and worth many, many bicycles, so you should neither economize on safety nor have the wrong kind of investment in the first place. You need to protect your money from thieves, external forces and the ravages of time.

It is necessary to find out just how safe your investments are and whether they are suitable for you. There are a wide variety of products out there and customer confusion is widespread. For most investors, the best advice is not to make life too complicated. There are also lots of bike locks out there, but you don't need to check them all out. Just be sure that what you choose is right for you, which means that it's fully tried and tested, and that you have already weighed in all the pros and cons. Most importantly, make sure to buy from reputable dealer.

The Bottom Line
The concepts of suitability and safety extend way beyond the field of investment and often in a remarkably similar manner. There are lessons to be learned both ways. The analogy about the different kinds of bicycle locks can teach us a lot about investments, about both what you can and should find out and what inevitably remains unknown or risky. However, in both spheres of life, acting prudently and with as much information as possible can minimize most risks.

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