Ask HN: what to do if you have only cash?
20 comments
I recommend this book:
William Bernstein, The Four Pillars of Investing.
(I also read Andrew Tobias' book, which is decent enough, although he's more of a light read.)
The super-short version: Index funds.
The Impatient Person's version: First, pay off all consumer debt (credit cards and car loans) and amass a pile of emergency cash equal to three to six months' living expenses. Anything extra after that goes: one third in a whole-market domestic stock index fund, from Vanguard or Fidelity if you're in the USA (an S&P500 fund is a bearable approximation), one third in an international stock index fund with low fees; one third in bonds. If you can figure out how to buy bonds denominated in another currency, that might be nice, but watch out for the fees.
Better, however, to just read the book, which discusses the principle of diversification and drills you on basic skills (distrust most financial industry pros; don't pretend that you or anybody else can reliably pick individual stocks; don't panic in every bear market because the darned things happen on a regular basis; etc.)
Don't put undue faith in gold. And don't feel that you have to go crazy buying consumer goods before the prices go up: At the moment, we're as likely to have a period of severe price deflation as anything else. Just look at what the sag in the economy has done to the price of gas, and everything connected to it.
William Bernstein, The Four Pillars of Investing.
(I also read Andrew Tobias' book, which is decent enough, although he's more of a light read.)
The super-short version: Index funds.
The Impatient Person's version: First, pay off all consumer debt (credit cards and car loans) and amass a pile of emergency cash equal to three to six months' living expenses. Anything extra after that goes: one third in a whole-market domestic stock index fund, from Vanguard or Fidelity if you're in the USA (an S&P500 fund is a bearable approximation), one third in an international stock index fund with low fees; one third in bonds. If you can figure out how to buy bonds denominated in another currency, that might be nice, but watch out for the fees.
Better, however, to just read the book, which discusses the principle of diversification and drills you on basic skills (distrust most financial industry pros; don't pretend that you or anybody else can reliably pick individual stocks; don't panic in every bear market because the darned things happen on a regular basis; etc.)
Don't put undue faith in gold. And don't feel that you have to go crazy buying consumer goods before the prices go up: At the moment, we're as likely to have a period of severe price deflation as anything else. Just look at what the sag in the economy has done to the price of gas, and everything connected to it.
I understand the concept behind index funds -- I loved Bogle's books on the subject -- but I wonder if it still makes sense, at least in the USA. Caveat: I know just enough economics to be dangerously uninformed. ;)
The all-market index fund is an expression of faith in "the system". I am a bit concerned that markets in the US just aren't what they used to be in Bogle's heyday. I look at the housing crisis and I see entire industries based on large-scale dishonesty or incompetence, with no serious oversight from Congress or the press.
Everyone assumes that the USA is a big machine for creating value, because it always has been. But is there really any evidence for this in the past 10 years? At this point, we've wiped out most of the gains since 2000. If you disregard the various bubbles, did anything really get done?
Bogle himself warned that American capitalism, since the late 80s or so, has been abandoning its old principles of rewarding risk-taking and investment. The American economy is now dominated by an elite managerial class, rewarding itself regardless of performance or economic sanity. Bogle called this "managers' capitalism". Economist George Akerlof bluntly calls it "a form of looting".
Vanguard has foreign and industry-specific index funds to address weirdos like me, but in a sense that's the sort of stock-picking that the index fund was designed to avoid. I still feel confused by it all.
The all-market index fund is an expression of faith in "the system". I am a bit concerned that markets in the US just aren't what they used to be in Bogle's heyday. I look at the housing crisis and I see entire industries based on large-scale dishonesty or incompetence, with no serious oversight from Congress or the press.
Everyone assumes that the USA is a big machine for creating value, because it always has been. But is there really any evidence for this in the past 10 years? At this point, we've wiped out most of the gains since 2000. If you disregard the various bubbles, did anything really get done?
Bogle himself warned that American capitalism, since the late 80s or so, has been abandoning its old principles of rewarding risk-taking and investment. The American economy is now dominated by an elite managerial class, rewarding itself regardless of performance or economic sanity. Bogle called this "managers' capitalism". Economist George Akerlof bluntly calls it "a form of looting".
Vanguard has foreign and industry-specific index funds to address weirdos like me, but in a sense that's the sort of stock-picking that the index fund was designed to avoid. I still feel confused by it all.
At this point, we've wiped out most of the gains since 2000.
So much to say about this, so little time.
First: I sat out of the market for several years after the 2000 crash. That cost me a bunch of money! Be careful not to make my mistake.
Second: The correct time to fret about pouring money into an overvalued stock market was three years ago. Now is not that time. Now is a much better time to buy, not to panic. Perhaps the market will crash some more and it will be an even better time to buy next year!
But no. Scratch that. The correct time to fret about investing is "never". You've got to employ a strategy that does not involve market timing, which is what you're doing when you sit on the sidelines wringing your hands. You are implicitly predicting that the market is going to fall some more. And you might be right, but you also might be wrong, and if you're wrong it will cost you.
(Unless, of course, you're 74 years old and can't afford to wait twenty years for a recovery. Asset allocation is a difficult art because it depends on personal circumstance. This is why, in a sense, there's no such thing as an "investment climate": There are millions of investment microclimates. You can't base investment behavior on what the herd is doing. For example, articles in the news are going to be filled with doom and gloom for a while, because much (if not most) of the large baby boom cohort is old enough that it's hard for them to wait out a major depression, and they will need to vent their misery. But their investment problems may not be your investment problems.)
What you need to do is diversify. Which brings me to point two: Anyone who was following a wise investment strategy would not have "wiped out all gains since 2000". That's because perhaps about 30% of your asset allocation (maybe more) should be in bonds, and you should rebalance every couple of years. So when stocks have a bubble and double in price, you sell stocks at rebalancing time and buy a bunch of bonds. Then, when the stocks inevitably crash again, the bonds remain, safe and sound. [1]
People yawn at bonds, particularly government bonds. They're just so boring. They don't post those spectacular gains that you'd get from day-trading technology stocks. But the thing is: they also don't crash in the same way that corporate stocks do. Their price movements are often opposite to those of stocks, or at least poorly correlated. Their risk profile is quite different. They are your buffer against the distinct possiblity that all of your stock gains are based on the maneuvering of dishonest, incompetent con artists -- which is okay, so long as the con artists represent only a portion of your assets.
Anyway, just read the Bernstein book. I can't retype the whole thing here.
I will say that your instinct to buy foreign funds is a fine one; it is not "weird" by any means, and it's not the same as stock-picking or market timing (Unless you change your asset allocation every five minutes. Don't do that!) You probably want to keep 30% to 40% of your stock assets in foreign stocks. I do wish it was easier to buy foreign bonds or currencies as well -- they tend to be restricted, or to be available only through funds that charge fees which threaten to eat up any small advantage that you'd get from the extra diversity. I've been toying with solutions to that problem.
---
[1] Of course, economic problems with global might take down the value of every asset at once -- we can't diversify to other planets. But at least you won't be alone in your pain if that happens.
So much to say about this, so little time.
First: I sat out of the market for several years after the 2000 crash. That cost me a bunch of money! Be careful not to make my mistake.
Second: The correct time to fret about pouring money into an overvalued stock market was three years ago. Now is not that time. Now is a much better time to buy, not to panic. Perhaps the market will crash some more and it will be an even better time to buy next year!
But no. Scratch that. The correct time to fret about investing is "never". You've got to employ a strategy that does not involve market timing, which is what you're doing when you sit on the sidelines wringing your hands. You are implicitly predicting that the market is going to fall some more. And you might be right, but you also might be wrong, and if you're wrong it will cost you.
(Unless, of course, you're 74 years old and can't afford to wait twenty years for a recovery. Asset allocation is a difficult art because it depends on personal circumstance. This is why, in a sense, there's no such thing as an "investment climate": There are millions of investment microclimates. You can't base investment behavior on what the herd is doing. For example, articles in the news are going to be filled with doom and gloom for a while, because much (if not most) of the large baby boom cohort is old enough that it's hard for them to wait out a major depression, and they will need to vent their misery. But their investment problems may not be your investment problems.)
What you need to do is diversify. Which brings me to point two: Anyone who was following a wise investment strategy would not have "wiped out all gains since 2000". That's because perhaps about 30% of your asset allocation (maybe more) should be in bonds, and you should rebalance every couple of years. So when stocks have a bubble and double in price, you sell stocks at rebalancing time and buy a bunch of bonds. Then, when the stocks inevitably crash again, the bonds remain, safe and sound. [1]
People yawn at bonds, particularly government bonds. They're just so boring. They don't post those spectacular gains that you'd get from day-trading technology stocks. But the thing is: they also don't crash in the same way that corporate stocks do. Their price movements are often opposite to those of stocks, or at least poorly correlated. Their risk profile is quite different. They are your buffer against the distinct possiblity that all of your stock gains are based on the maneuvering of dishonest, incompetent con artists -- which is okay, so long as the con artists represent only a portion of your assets.
Anyway, just read the Bernstein book. I can't retype the whole thing here.
I will say that your instinct to buy foreign funds is a fine one; it is not "weird" by any means, and it's not the same as stock-picking or market timing (Unless you change your asset allocation every five minutes. Don't do that!) You probably want to keep 30% to 40% of your stock assets in foreign stocks. I do wish it was easier to buy foreign bonds or currencies as well -- they tend to be restricted, or to be available only through funds that charge fees which threaten to eat up any small advantage that you'd get from the extra diversity. I've been toying with solutions to that problem.
---
[1] Of course, economic problems with global might take down the value of every asset at once -- we can't diversify to other planets. But at least you won't be alone in your pain if that happens.
I'd go for the gold. 30,000 years of history deserve more respect than 100 years of a weird economy with major problems and a dearth of good explanations. So, physical gold, some silver, some mining company stocks, and maybe diversify by buying some stock in an farm company in US. Have some cash stashed away, and maybe buy some index funds.
My ideal portfolio:
25% bullion (Mostly gold, some 14k gold rings, some silver, along with a digital balance and a jeweller's touchstone kit for determining purity).
15% cash in a sock.
16% mining company stock.
12% index fund.
7% ag company (basic foodstuff, like wheat or other cereals).
15% in a savings account.
1 pistol, 1 body armor and 3 years of ammo. Consider investing in self-defense and food.
I know, it's very reddit of me, but this way, if the shit hits the fan, you'll only lose a small amount of your portfolio, and the rest will go way up. If things are fine, you're fine. Not as fine as your peers, but fine nonetheless.
My ideal portfolio:
25% bullion (Mostly gold, some 14k gold rings, some silver, along with a digital balance and a jeweller's touchstone kit for determining purity).
15% cash in a sock.
16% mining company stock.
12% index fund.
7% ag company (basic foodstuff, like wheat or other cereals).
15% in a savings account.
1 pistol, 1 body armor and 3 years of ammo. Consider investing in self-defense and food.
I know, it's very reddit of me, but this way, if the shit hits the fan, you'll only lose a small amount of your portfolio, and the rest will go way up. If things are fine, you're fine. Not as fine as your peers, but fine nonetheless.
I'm investing in emergency zombie-outbreak kits. Each include a mask, shotgun w/ shells and a case of redbull.
Right, caffeine. I knew I left something out.
Why did you go for a pistol? If you expect things to go really bad then surely a hunting rifle would be more useful, and perhaps a shotgun for personal defense.
The economic meltdown version of Godwin's law clearly seems to be when someone suggests buying gold and weapons. Often even with the requisite response: why a gun instead of a pistol?
For an account (previously on HN a few times) from someone in Argentina who really went through total currency meltdown:
http://www.frugalsquirrels.com/cgi-bin/ubb/ultimatebb.cgi?ub...
For an account (previously on HN a few times) from someone in Argentina who really went through total currency meltdown:
http://www.frugalsquirrels.com/cgi-bin/ubb/ultimatebb.cgi?ub...
I won't even mention who Godwin's law refers to, but I'd like to point out that they were alive at some point. By the same token, shit-hits-fan scenarios are awful and usually warnings are false alarms, but they happen. I don't think that doesn't mean we can't talk about them without getting into a flame war. I think HN is civilized enough to address these topics once in a while and come up with an interesting discussion.
He has a blog.
http://ferfal.blogspot.com/
http://ferfal.blogspot.com/
why a gun instead of a pistol?
A pistol is a type of gun.
A pistol is a type of gun.
For reasons outlined by FerFAL at http://www.frugalsquirrels.com/cgi-bin/ubb/ultimatebb.cgi?ub...
Handguns: Revolver or Pistol? Pistol ALL THE WAY! Yes, I saw the video of the guy that accurately emptied his S&W in ½ a second. I also saw the shooting range and the crowd behind him, watching the event. Can he shoot and reload that way if he is in his car, driving with one hand and shooting with the other, while a bunch of scum bags in another car are shooting at him? Hey, maybe he can. I know I can’t. Can you? Generally speaking, the revolver is more difficult to master than the pistol. The double action is hard and it affects speed and accuracy. It can be done, but I found that pistols are easier, as did many shooters. Also, even though they seem to be more simple, revolvers are not as rugged as service pistols, the mechanisms that cycles the cylinder and cocks the hammer is both complicated and fragile compared to auto pistols. Before anyone starts casting evil voodoo spells at me for insulting their prized S&W or Ruger: I own revolvers and like shooting them, I just don’t think they are the best option for self defense, and I see that everyone I talk to in my country who is worried about security as I am also chooses pistols. Quality pistols resist sand, mud and dirt in general better than revolvers, where a small pebble locked in the mechanism may render the revolver inoperable.
Handguns: Revolver or Pistol? Pistol ALL THE WAY! Yes, I saw the video of the guy that accurately emptied his S&W in ½ a second. I also saw the shooting range and the crowd behind him, watching the event. Can he shoot and reload that way if he is in his car, driving with one hand and shooting with the other, while a bunch of scum bags in another car are shooting at him? Hey, maybe he can. I know I can’t. Can you? Generally speaking, the revolver is more difficult to master than the pistol. The double action is hard and it affects speed and accuracy. It can be done, but I found that pistols are easier, as did many shooters. Also, even though they seem to be more simple, revolvers are not as rugged as service pistols, the mechanisms that cycles the cylinder and cocks the hammer is both complicated and fragile compared to auto pistols. Before anyone starts casting evil voodoo spells at me for insulting their prized S&W or Ruger: I own revolvers and like shooting them, I just don’t think they are the best option for self defense, and I see that everyone I talk to in my country who is worried about security as I am also chooses pistols. Quality pistols resist sand, mud and dirt in general better than revolvers, where a small pebble locked in the mechanism may render the revolver inoperable.
Handguns: Revolver or Pistol?
A revolver is a type of pistol.
A revolver is a type of pistol.
Are you in Germany or the U.S? I don't know much about Germany's legal protections or the stability of their currency. I'd imagine that given their past experience with hyperinflation, they're pretty careful.
In the U.S, I think cash is about the safest thing you can hold, in an FDIC insured account under the insured limit (currently $250k). Don't believe any of the stuff you read on Reddit about hyperinflation; Redditors are largely idiots and don't know a damn about economics.
If hyperinflation does hit, you will have bigger problems than the security of your savings, notably how to get food and how to avoid being killed in a riot. Your best bet here is the same as if there is no crisis: friends, skills, and a reputation for being a decent human being.
The depression-era advice of "neither a borrower nor lender to be" is also appropriate. In a crisis, the fewer financial ties you have to other organizations, the fewer potential credit risks. Pay off your credit cards, pay off your car loans, pay off your mortgage if you can, and avoid holding bonds or other debt on risky organizations.
In the U.S, I think cash is about the safest thing you can hold, in an FDIC insured account under the insured limit (currently $250k). Don't believe any of the stuff you read on Reddit about hyperinflation; Redditors are largely idiots and don't know a damn about economics.
If hyperinflation does hit, you will have bigger problems than the security of your savings, notably how to get food and how to avoid being killed in a riot. Your best bet here is the same as if there is no crisis: friends, skills, and a reputation for being a decent human being.
The depression-era advice of "neither a borrower nor lender to be" is also appropriate. In a crisis, the fewer financial ties you have to other organizations, the fewer potential credit risks. Pay off your credit cards, pay off your car loans, pay off your mortgage if you can, and avoid holding bonds or other debt on risky organizations.
Germany, but we don't have a German currency anymore. It is all Euro, and while I don't know enough details, I have heard that the way the Euro is constructed is not exactly bulletproof.
Inflation seems pretty likely to me, giving governments across the world are busy dishing out sweet deals to struggling industries. And governments get their money by printing it (if all else fails). Also Iceland comes to mind.
Of course I hope that nothing really bad will happen, but the truth is, I have no idea how severe the current crisis is. A lot of people are worried about hyperinflation, for example, but what are the odds? 1%? 0,001%, 10%?
Also, even without the crisis I think it has always been a good idea to diversify one's assets.
Inflation seems pretty likely to me, giving governments across the world are busy dishing out sweet deals to struggling industries. And governments get their money by printing it (if all else fails). Also Iceland comes to mind.
Of course I hope that nothing really bad will happen, but the truth is, I have no idea how severe the current crisis is. A lot of people are worried about hyperinflation, for example, but what are the odds? 1%? 0,001%, 10%?
Also, even without the crisis I think it has always been a good idea to diversify one's assets.
Gold worries me these days. It's gone up so much lately that I think it's overvalued. Of course, I discouraged my husband from buying up gold when it was much cheaper a year ago for this same reason and he still hasn't forgiven me. For a civilization collapsing catastrophe, I still think we're better off with the bags of rice and bottles of bourbon we hoarded instead.
I'm not a fan of index funds. At the risk of going against popular wisdom, I think it's better to put your money in a fund that is actually managed by a financial professional. Index funds follow the general market hell or high water, and even though their fees are generally lower since it doesn't take any brains to manage one, you'll never maximize your returns (or these days minimize your losses) with one. The key phrase to look for is 'no load mutual fund'. These funds will generally minimize fees at the time of your deposit and withdrawl. I've been happy with the Muhlenkamp Fund overall, of course they're in the gutter like everyone else at the moment.
The thing to remember is that the price of both gold and funds will fluctuate, and in either case you wouldn't be able to get at your money right away. I keep an HSBC high interest rate savings account for emergencies. There's enough money in there to pay my insurance deductibles if I crash my car into my house and both burn down. I contribute monthly to pay my semi-annual insurance premiums plus a little extra to give me that deductible buffer. It's probably around 2 months living expenses, which is within my risk tolerance, but you might want to sock away at least 3 months worth before investing the rest.
I'm not a fan of index funds. At the risk of going against popular wisdom, I think it's better to put your money in a fund that is actually managed by a financial professional. Index funds follow the general market hell or high water, and even though their fees are generally lower since it doesn't take any brains to manage one, you'll never maximize your returns (or these days minimize your losses) with one. The key phrase to look for is 'no load mutual fund'. These funds will generally minimize fees at the time of your deposit and withdrawl. I've been happy with the Muhlenkamp Fund overall, of course they're in the gutter like everyone else at the moment.
The thing to remember is that the price of both gold and funds will fluctuate, and in either case you wouldn't be able to get at your money right away. I keep an HSBC high interest rate savings account for emergencies. There's enough money in there to pay my insurance deductibles if I crash my car into my house and both burn down. I contribute monthly to pay my semi-annual insurance premiums plus a little extra to give me that deductible buffer. It's probably around 2 months living expenses, which is within my risk tolerance, but you might want to sock away at least 3 months worth before investing the rest.
I haven't bought gold last year for the same reasons, but now I am sorry that I don't have any. The thing is, I wouldn't buy it so much as an investment, but rather as a kind of insurance. So ideally I would never have to sell it, and pass it on to my children instead. It would still be annoying if it would lose it's value (as it probably would occasionally), but I don't know any good alternatives.
Agree on index funds being bad in general. They distort the market. CRM at over 300 Future P/E...who wants that? You watch the whole market over swing...
I think gold is a better move than anything denominated in dollars. Inflation is coming.
A good amount of cash and physical assets makes sense for emergencies- if power goes out for a couple of weeks, the atm won't work.
I think gold is a better move than anything denominated in dollars. Inflation is coming.
A good amount of cash and physical assets makes sense for emergencies- if power goes out for a couple of weeks, the atm won't work.
put it into a high yield FDIC online savings account (i use HSBC direct). your money won't disappear if the bank is FDIC insured (unless you have more than $100k in a single account, in which case, spread it out across banks until its less than $100k)
save until you have 4-6 months of living expenses tucked away. you don't want to be caught with your pants down in this economic environment.
after that, you can worry about investing money. i'd suggest starting a retirement account, either 401k or roth (probably roth from the sounds of your situation).
regularly and unwaiveringly put money into it every month (even if its just a little -- the important part is that you're doing it and growing it). invest your retirement savings into a solid, diverse handful of index funds.
index funds are key, because the cost is minimal. invest and forget it. retirement is long-term. even after this bad downturn, the market will go back up. i haven't touched anything in my retirement account. you don't want to be the idiot who sold on the bottom and later has to buy again when the price is back up.
after that is all taken care of, then you can buy some gold, or stock up on roombas and iphones if you have cash to spare. the important thing is to take care of what needs to be taken care of. save for an emergency, and prepare at least a bit for retirement.
edit: just noticed you're from germany, not the US. my bad. i'm not sure how FDIC would apply to you or if there are any similar institutions in european banks. might want to check into that.
save until you have 4-6 months of living expenses tucked away. you don't want to be caught with your pants down in this economic environment.
after that, you can worry about investing money. i'd suggest starting a retirement account, either 401k or roth (probably roth from the sounds of your situation).
regularly and unwaiveringly put money into it every month (even if its just a little -- the important part is that you're doing it and growing it). invest your retirement savings into a solid, diverse handful of index funds.
index funds are key, because the cost is minimal. invest and forget it. retirement is long-term. even after this bad downturn, the market will go back up. i haven't touched anything in my retirement account. you don't want to be the idiot who sold on the bottom and later has to buy again when the price is back up.
after that is all taken care of, then you can buy some gold, or stock up on roombas and iphones if you have cash to spare. the important thing is to take care of what needs to be taken care of. save for an emergency, and prepare at least a bit for retirement.
edit: just noticed you're from germany, not the US. my bad. i'm not sure how FDIC would apply to you or if there are any similar institutions in european banks. might want to check into that.
I'm in a similar situation, I looked at stocks, but really to make much money out of the stock market in bearish conditions, you need a hefty amount to invest in the first place, unless you go down the spreadbetting path, but that's dangerous territory if your not in full control of your passions.
I'm going to invest the money instead travelling in the spring, to check out eastern europe - 90% pleasure, but I'm arranging to meet up with some startups over there and who knows, I might take a punt on one of them.
Nevertheless, it all being in cash (not in a sock in my home, but flexible saving accounts) makes me a bit nervous, especially with the financial crisis around the corner. But changing the situation is difficult. Maybe HN has some ideas?
I can not afford to buy a house or flat. I don't know enough about the stock market to invest successfully - plan to buy some Amazon shares, but that is it. Index certificates I don't understand - banks could go broke, and besides, who determines the index. Is it so much different from fund managers, who I have learned can not be trusted?
I intend to buy some gold (like for about 3000€) - probably the price is quite high atm, but it should be an emergency thing, so even if it loses half it's value, it would not be too bad if it could get me safely out of the country or something.
Also thinking to simply buy as much stuff as possible that I had been putting on hold - iPhone, roomba, book travels,...
Bad idea? What else could I do?