“Mattress risk”

Given the recent market crisis, we’ve heard a lot about how the “only safe place” to invest your money is your mattress.

One of my colleagues forwarded me this story from CNN. It’s about an older woman who had stuffed her $1 million life savings into her mattress—only to be horrified when she learned that her daughter had gotten her a new bed as a gift … and thrown out the mattress with the money in it.

The story says more about the nature of risk in just a few sentences than I could in pages. The bottom line: There are always risks out there, and avoiding the risks of investing—or even avoiding doing business with others generally—doesn’t mean you’ve done away with risk.

Another lesson: There are risks you bear that can earn you a return, and some you won’t get paid a thing for. The great thing about bearing the risk of diversified investments is that hundreds of years of history, as well as basic financial principles, suggest that you’re justified in expecting to earn a “return premium,” on average, for doing so.

Of course, expecting a premium doesn’t guarantee you’ll get it. That’s the risk part. But putting up with a measured amount of financial risk strikes me as a lot more attractive than a hoarding strategy.

When you hoard cash, there’s little or no possibility of gain, and at least some exposure to other potentially disastrous risks, such as inflation, fire, and flood, as well as some of the more unusual risks that are a part of life. And those are risks that you don’t get paid a cent to bear.

Notes:

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