Monday, April 28, 2014

Messages From Readers: Time Is On Our Side

This is a cool looking clock.

A while ago, I wrote a post about certificates of deposit, and received a quite detailed comment. I’ve reposted it here for those who are interested in this stuff. 

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"I am going to challenge this quite sensible advice- so be prepared for some nit-picking. But Joan makes the point that, “You want to earn a little interest on your money with no risk of losing any. “. Well guess what, CD's are not risk free: there is no such thing. Now CDs are generally backed in some way by the FDIC, and, accordingly, are about as risk-free as can be found in known space. But, for example, all bets would be off it the US government ever defaults on a direct obligation of the US Treasury, which, over the course of the expected lives of college students today, I would not consider to be all that improbable: just in the course of my life, the USA has gone from the world's biggest creditor nation to its largest debtor nation (a fine legacy baby boomers have left millennials). 

Moreover, even though the FDIC might guarantee your CD, if the issuing bank defaulted, it might be two years before the government made good on its guarantee (and I wouldn't hold my breath about getting interest during that time). As a way to mitigate risk, savers might want to make sure their CD is with an FDIC-insured bank.

But there are other ways that CD's involve risk. Even though your money may appear “safe”, there is a sleeping thief that I believe will awaken from its slumber. It's called inflation. The USA has never experienced hyper-inflation, but it has experienced significant bouts of it- double digits in the 1970's before the Federal Reserve panicked and “hit the brakes hard”, precipitating a nasty recession that was only broken by the pro-growth tax policies of the Reagan era (little soap box there). My point is, if you lock up money for a few years at 2.5%, but inflation runs at 12% annually, you are in fact losing purchasing power. In Germany in the 1920's- or Zimbabwe in the 21st century- inflation has been over 1000% per year- people would spend their paycheck as soon as they could, knowing that the money would be worth significantly less next week.

Finally, Joan notes that she has become more risk tolerant during the course of her life. Now everyone needs to do what he or she can to not place the rent-money at risk. However, I think people in the age bracket of the the intended readers of this blog should not be afraid to embrace a certain amount of risk. Manage your risk, but don't try to stuff all your money in proverbial mattress, which is what a CD is, in my opinion. 

My father had a neighbor in the 1970's/1980's who was quite happy with his CD that he had purchased when inflation was near its peak, and the neighbor did reasonably well with his investment, But my dad smiled to himself, and noted privately he had done much better with an investment he had made about the same time in a large capitalization, dividend paying company. Over the course of the life of his neighbor's CD, my father's investment had fluctuated, but, by embracing a degree of risk (after the stagflation of the '70's, few people- particularly “liberals” like my father's neighbor, hehe, anticipated the Reagan era growth)." 

- sherwood 

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The part that I’d to emphasize again is: “...Manage your risk, but don't try to stuff all your money in proverbial mattress…”

It’s true that I want people to learn how to handle money better and not take dumb risks like going to the casino, but some risks are worth taking. For example, investing some of my money in the stock market when I have decades to make up for losses is fine by me (especially because I have savings set aside).

It’s obvious from what he’s written that the author has much more experience than I do, so I would recommend taking his advice. :) 

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As always, contact me with questions or suggestions! You can either comment directly on the post or send me an email to moneymattersjoan@gmail.com. 

Photo Credit: Express Monorail via photopin cc

1 comment:

  1. Now Joan,

    The investing world has a way of making fools of people with far greater
    experience than that long-winded respondent you so graciously cited. Why shucks, whilst distilling what he thinks passes for great investment wisdom (viz. "... Manage your risk, but don't try to stuff all your money in [a] proverbial mattress…”), the semi-literate apparently doesn't even know when to use the indefinite article 'a'. In fact, I will wager that, by sticking with what you know, you are a better financial guide than the poster you quoted (the odds are in my favor- on average, women are better investors than men).

    Nevertheless, even a stopped clock is right twice a day, so let's assume for a moment that this guy might have some insight worth listening to.
    Now unless you have a fair amount of investment savvy, once you
    accumulate great wealth, you probably should pay for professional
    money management. But it's probably a safe assumption that most people here aren't yet in financial circumstances for which professional money management is indicated.

    Still, there are still better places to gain investment insight than from
    some blowhard pontificating on a college student's web site. Here
    are some places that, once a person has reaped the benefits of
    moneymattersjoan, he or she might go for free advice from people with
    far more financial acumen than the n'er to well you cited:

    Here's a young business in the business of offering financial advice, much of which they are giving away:

    www.thefreefinancialadvisor.com/

    Here's hoping Joan can direct us to the best of their wisdom!

    This site may be a bit dry (hey, it's a government site) but what it lacks
    in entertainment value, it makes up in authoritativeness:

    http://www.sec.gov/investor/pubs/beginmutual.htm

    Knight Kiplinger was one of the first to bring expert financial advice to
    the masses, and his flagship publication remains a valuable source of
    information for those seeking financial enlightenment:

    http://www.kiplinger.com/

    Ok,this one is not free, and it is pitched toward those who at least
    aspire to a degree of financial sophistication. But basic membership
    is not expensive- I think you frequently can wrangle a one year
    “introductory”membership for $19.95- and they offer advice from
    sophisticated, successful professionals:

    www.aaii.org

    Hope I'm not out of line by linking your competition!

    ReplyDelete