Principles for responsible investing - Indestructible investments

Building a great investment strategy can be challenging, building a bad one can be disastrous.

Establishing principles for responsible investing is the first step in building wealth long-term. I like to think of them as the 'rules of engagement'. I don't touch an investment unless it meets all four of these principles.

Principles of Sustainable Investing

The first principle for responsible investing

Losing an entire investment taught me a lesson I’ll never forget— my first share investment didn’t just crash, it took a two-year scenic route to bankruptcy, taking my $2000 along for the ride!

The famous Warren Buffett's quote rings true here:

"Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1."

Lesson learned, Murphy's law states that "If anything can go wrong, it will go wrong". Therefore, now I simply don't leave any option for an investment to go to zero.

There are three characteristics which indestructible investments can possess:

• Supply Diversification - where an investment is diversified across unconnected suppliers for example a company index fund such as the S&P500 (many suppliers of goods and services), or REIT funds containing many different properties (many accommodation suppliers)

• Demand Diversification - where demand drivers are universal, that is, the investment cannot be replicated or easily be replaced by an alternative and is always in demand. Some examples here include commodities such as silver, gold or oil. Global demand, but they can't be replaced easily.

• Government Guarantee - Because governments can make laws, tax their citizens and create money. This provides them the power to guarantee some investments, such as government bonds, or as we saw in 2008, financial institutions or 'Too big to fail' critical industries such as car makers. These can make for excellent investment opportunities during downturns because there is no risk of total collapse.

Government Guarantee on price of Bonds

Let's consider a real-world example which is playing out right now. With ongoing tariffs on other countries and the internal unrest, international investors are all selling US bonds at the same time. This has caused the price of the 20year bond to decline over 50% in 5 years. As the bond values decline the yield they pay increases. During the same period the yield for the 20year bonds have increased from almost 0% to around 5% now.

This dramatically increases the cost of borrowing for the US Government and with the deficit at all-time highs they cannot afford to let this continue to increase. So, when the selling pressure on bonds gets too high the FED starts purchasing bonds creating more demand.

Here we can see the impact of these purchases on the FED balance sheet which stopped declining as they purchased more newly issued bonds to replace the expiring bonds.

So, if the FED is going to guarantee the price won't go significantly lower, and we get paid a guaranteed 5% just to hold the investment while there is a potential upside of over 100%, that is a fantastic opportunity for anyone.

While most people are selling bonds, I'm busy buying. And that's how a 'guaranteed' investment can create an amazing opportunity for profit.

Knowable Investments

So now we know how to look for indestructible investments, but unless we know if they are going up or down, we could end up buying investments that decline for long periods of time. As in the example above, losing 50% of its value over 5 years is very painful. Even if we know they won't go to zero.

Next week, we will explore how to identify the drivers for these investments so you can purchase them at the correct time. Great investments incorporate both a good price and good timing to deliver amazing returns.

Don't leave your future up to chance! Check out the free guide and other resources on the home page.