Well, with all the bad news on Wall Street this week about AIG, Merrill Lynch and Lehman Brothers, it’s no wonder you’re worried about your retirement fund, pension, annuity or other investments!
I mean this is the first time in years I can remember mainstream media people use the phrase “bank run”! But seriously, if you are that worried about the economy and failure of US financial institutions, you have plenty of ‘safe choices’.
Money Market Accounts
I’m a big believer that if you don’t know where else to put your money leave it in cash! Sure, you may miss out on a big opportunity to short sell stocks or go long on shares that have been hammered down, but then again you can sleep easily knowing your money is safe and protected by FDIC guarantees!
The other thing about being ‘in cash’ is that you are completely flexible to shift money into riskier opportunities when you feel the time and actual opportunity exists.
Bonds a Safe Harbor
I’m not a big believer in corporate or government bonds. Call me foolish or naïve, but I just don’t think bonds are a good long term investment and they always want you to tie up money for a long time or else you end up losing money to discounts if you sell early.
That’s just been my own experience but if you think bonds are a good investment by all means give me a shout and let me know what’s so great about them please! Yah, I know they are lower risk than stocks, but in the long run do they really return that much more than CDs or money market rates? They always say that older people should buy bonds but I’ve never bought that.
My concern as I get closer to retirement will be inflationary risk and the possibility that I spend down my assets before I die because I was too damned conservative! Don’t let the ‘financial experts’ fool you into believing that bonds are the best ‘income investment’ you can make!
I met a gentleman in the airport a while back who invested in apartment complexes in Southern California after World War II. Now, he owns 150 units FREE AND CLEAR and, in his eighties, has after-tax income of well into 7 digits! Now that’s smart investing and I bet he built a lot of his real estate portfolio during down markets in California real estate too.
See, I just have a hard time playing it safe, sorry!
Certificates of Deposit a Good Place to Park Funds
If you know you aren’t going to need your money in the next 90 days, 6 months or a year, then CDs give you a guaranteed interest rate and are completely insured. But then again, how can you ever really know you won’t need that money sooner?
Again, being the penultimate opportunist means being ready to strike when the right investment comes along, so CDs just never made sense to me; unless you can make at least a one or two point premium versus current money market rates, it just doesn’t seem to be worth having funds ‘tied up’ or else having to pay a penalty to cash out early.
Long Term Annuities Keep On Paying
Now, having been a one-time insurance  salesman, I can tell you that annuities don’t always make much sense … unless you want a guaranteed income stream for the remainder of someone’s life! Sure, you don’t earn the same kind of return you would on CDs or bonds, but then again where else can you be certain you’ll receive money as long as you live? And with most annuity products you have the option to receive fixed payments or ‘annuitize’ the payments, accepting a smaller payment that will be constant until the death of the beneficiary.
I will say that in most cases, an index mutual fund outperforms an annuity from a rate of return perspective, but that’s not always the only point.
The only other (really almost the same) type of benefit would be a good old fashioned pension fund, which seems to be going the way of the horse and buggy these days! In fact, annuities were specifically invented to supplement pension funds and provide income for loved ones after you die. So you invest a little now in order to ensure your spouse, child, grandchild or other heir of your choice can receive a little bit each year for a certain amount of time … or for the rest of their life.
If you can find a variable annuity with low enough expense ratios, it may be worth putting some amount of money into one … to provide for yourself in retirement or as a way of providing for others after your death. The thing that makes sense about annuities is that they carry out a specific financial goal; perhaps you are afraid your young nephew is not ready to inherit a large sum and wish to see that he has some income regardless what else happens. Or, perhaps you have a grandchild who is disabled and wish to ensure that a regular income is available to her regardless of other circumstances.
But What about Inflationary Risk?
So I brought up something interesting in that last paragraph; something called ‘inflationary risk’. It’s not really a term that has been talked about that much since the early 80s when inflation was rampant and I remember my father saying “We’ll never, ever, again see five percent interest rates”!
God rest his soul, he was a very smart man and a wise investor but he really got that one wrong, only to prove an axiom to which he subscribed; “History always repeats itself.” And perhaps in almost no human endeavor other than commerce can this be more closely true. That’s why I don’t like playing it too safe; I’d rather be aggressive and earn the long term historically higher rate of return that stocks and real estate have demonstrated time and again.
The most important lesson you should learn from any basic economics text book is that all markets move in cycles, shifting between fear and greed, demand and supply. Sooner than you think that pendulum will begin to swing back the other way so don’t sit on the sidelines for too long. Find the opportunities that you are comfortable with and take a little more risk with some part of your investment portfolio.
So, What Should I Do with My Money?
Of course as your net worth increases, the answer to this question changes substantially. When you don’t have a pot to piss in, take risks to build a little capital. You are (or should be) young and hungry, with time to make up for mistakes and miss-reads.
On the other hand, as your portfolio goes up you need to begin to diversify and spread risk a little more. Then you can put some money in CDs without worrying about the need to take it out early and pay a penalty. You have the leeway to invest some in higher risk opportunities as well as having plenty put aside in money equivalents to meet short term needs.
This is the financial state to which we all should aspire; it’s hard to get money, but once you have some money it gets easier to make more money. Sounds easy, don’t it?