My musings on the economy, life, technology, business and things I find interesting.

Tuesday, April 29, 2008

Where do I put My Money: Rule #1


They say money is hard to hold onto and easy to get rid off. Money, it seems, is something everyone wants. On a macro scale all of this boils down to a lot of people trying to separate each other from their money. On a micro scale it's not so simple, but I digress.

The forms in which people are separated from their money are numerous: services, fees, taxes, price depreciation, commissions, consumables, loss/theft and of course inflation.

That's a list of avenues for loss. The root causes would sound different, something like: greed, usury, excess, stupidity, ignorance, pride, foolishness, laziness, etc.

Money is meant to represent value, value you're received by either selling a product/asset or providing a service. Most people, organized crime excepted, don't like holding lots of cash, it tends to make them feel vulnerable to loss so they want to put it somewhere safe, maybe even watch it grow a little.

Therein lies the dilemma of the day. Your school taught you math but it never taught you about family finance and managing debt. Your parents raised you with good morals but they never shared with you their financial planning woes. Finally, not least of your dilemmas are your three friends who just became financial planners and have managed to be no less astute with their own money then your cat Captain Whiskers.

So here you are with some money left over and you're wondering what on God's green earth you should do with it.

Rule #1: Nothing is Free

When the tech bubble was flying high the mantra was "It's a New Economy Stupid", bonds, term deposits and blue chips where industrial age nonsense. The real ticket was in the next tech flyer, the world had changed.

Of course the world hadn't changed, people still drove cars to work, bought their groceries each week and looked forward to a trip to Disney with the kids. It was just the appearance of wealth, a mirage, a pyramid scheme funded by cheap money. Like all bubbles it collapsed under it's own weight.

Returns and risk are directly related, they are proportional. Higher return = higher risk, lower return = lower risk. If you take a small enough view you can pretend that this rule doesn't apply. Believe me they were handing out blinders at every street corner because everyone thought the rules had changed. The analogy here is the cult classic "They Live" with Rowdy Roddy Piper.

The market going up for a week, a month, a year or even a decade doesn't make you smart it makes you fortunate to be in the market while it was going up, but that's not so glorious is it. You might think that intelligence would be a mitigating factor to loss, but all those PhD's running Quant funds illustrate otherwise. Some might claim that inside access would be a mitigating factor, you'd be wrong again: all the banks knew better then anyone the crap inside their various asset backed paper; billions of losses later they're still reeling from the pain.

Surprisingly, the things that tend to make good investors are fiercely independent thought, humility, patience, ability to acknowledge reality and a stomach of Adamantium. Great investors are boring. These traits allow you to properly analyze the real risk and reward balances in the market and make smart decisions.

So after all this you're probably wondering, "that's all and wonderful, but where do I put my stinking money?". The simple answer is until you have someone who you can trust (including yourself) to help you circumnavigate all the factors you should put your money somewhere that is very safe and which will at least guarantee you the return of your principal.

Without thinking, the easy answer is to deposit amounts below the federal insurance protection limit into a savings account with a large conservative bank. Look for banks with little to no exposure to the current mortgage security meltdown and strong tier one capital ratios.

Rule #2 to Follow at some later point in time.

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