How Counter-Party Risk Kills Your Portfolio

If you don’t know what counter-party risk is, here’s a short description:  In any trade/investment involving two or more parties, the risk to the buyer is whether the “counter-party” can pay up.

It seems simple enough but have you ever considered that the stocks and bonds you own may not be able to give you your money back when it’s crunch time? 

It’s usually not the case for most major corporations (with assets like buildings, inventory, manufacturing plants, etc.) who get into financial problems.

However, when a push comes to a shove, all you really own is a piece of paper that represents a promise to pay you whatever the “Market Price” * of that paper is worth.

(* Note: Market price does not mean you get your money back. It simply means whatever the current market is willing to pay for that particular asset.  A classic example is when you own bonds and interest rates are rising.  You may have a $10,000 bond but because of interest rates rising it may only be worth $8,000.)

Don’t worry, we’re not saying stocks or bonds are worthless.  We’re trying to get you to understand how a counter-party can default on their promise leaving you holding the bag.

No Counter-Party Risk

The easiest illustration of this owning gold.

Specifically, physical gold and not a piece of paper saying you own some.  (We explain this in detail in an article titled “Gold. If you don’t hold it, you don’t own it.” (HERE)

If you own (and hold) gold coins or bars, there is no counter-party risk of default.

And history proves gold has been around for over 5,000 years and has never defaulted. 

Compare that with the $1.4 Quadrillion derivatives market that backs up most of our financial system.

Huh?

That’s right…our financial system is backed up by derivatives.

Look at that number with zeros $1,400,000,000,000,000.

Do the math.

That is nearly 40 times larger than our national debt…which is mathematically impossible to pay off.

Putting that in perspective, consider these two questions:

• What’s the chance someone can cover that bet?

• How many people actually understand what a derivative is?

 Yet, millions of people invest with no clue of how to handle counter-party risk.

The Boyz in the “Club” understand the risks and don’t want you to know how to avoid them.

But we’ll show you their secrets here every month in our newsletter (HERE).

Share this with a friend.  And try to explain to them what $1.4 Quadrillion represents.  They’ll thank YOU later.

And tell them:

We’re Not Just About Finance

But we use finance to give you hope.

“And you shall know the truth, and the truth shall make you free.”

~John 8:32~