READY ACCESS INVOLVES . . .

PENALTIES

PATIENCE

PENALTIES

Some investments prohibit withdrawals of principal and interest entirely prior to a certain number of months or years. Others charge a percentage penalty (as distinguished from a tax penalty assessed by the IRS) if you withdraw your money too early. These penalties which restrict ready access or liquidity are neglected by the old, overly simplistic risk and reward trade-off equation. Why? Consider certificates of deposit issued by your local bank for terms of either one or five years. Which pays a higher rate and why? Of course, the five-year CD pays a higher rate, but not because there's any change in your risk. You have the same bank and the same level of FDIC insurance so risk cannot be the only factor that determines your potential return. That mystery factor is the Third R or ready access (liquidity) to your money.

PATIENCE

No bank, brokerage house, or even government is above-the-law (at least when we're talking the laws of economics). So, what allows these institutions to make guarantees that seemingly flout the risks and volatility of the world's markets? In a word - patience! By combining a system of penalties that force longer horizons and an ability to outlast individual investors, institutions can patiently await market rebounds.

 

Member Login
Welcome, (First Name)!

Forgot? Show
Log In
Enter Member Area
My Profile Log Out