Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Belt and Suspenders

What it is:

Belt and suspenders is a term to describe a risk-averse person or situation. The term refers to the act of wearing redundant items to hold up a pair of pants.
 

How it works (Example):

For example, let's assume John Doe is purchasing a small dry cleaner from Jane Smith. He puts the $2 million purchase price in an escrow account that is controlled by the bank and broker handling the transaction. The bank and broker are responsible for ensuring that all legal aspects of the deal occur properly before they can give the money to Jane Smith and close the deal. This provides some surety to John Doe that the deal will be done properly, that the business really exists, that Jane Smith is really the owner and that everything is as she says it is. In other words, the escrow account mitigates the risk that John Doe will "get taken."

However, if John Doe wants to put a belt and suspenders on the deal, he might get some sort of transaction insurance on the deal.

Why it Matters:

High risk means the potential for high returns and high losses. Thus, investors who are risk-averse like to "take a belt-and-suspenders approach."

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