Why Safety Is A Losing Strategy - Part 1 and Part 2


Jun 11, 2012

Written by Mary Buffett

Why Safety is a Losing Strategy – Part I

The deep, lingering stock market correction in 2009 is seared into our memories like a deep cut that hasn’t quite healed.  It still hurts.
Many saw impending doom and sold in a panic.   There are few actions you can take that are more certain to lose your money, but you know that.  You’ve been in a panic before, and you know that ‘going to pieces’ is never a great strategy – whether it’s with your money or not.

Those who sold consoled themselves by thinking that at least their money was safe now.  It sat in FDIC insured savings accounts, money market accounts, certificates of deposit and Treasury bills.  Can’t lose there.

Or can you?  Interest rates haven’t been this low in forever, but at least you get a little return, right?

Well, that depends.  First, you have to divide your money into two piles:

I Need It Soon and

I Need It Later.

Later is at least ten years.  No less.

If you need it soon, you’re absolutely right.  You must never, ever put money you need soon into the stock market.  It DROPS, for heaven’s sake.  If you need the money when it goes down, you’re up the creek without a paddle.  Even when you get a great stock tip, especially when you get a great stock tip, don’t use your “soon” money to invest.  Think facebook.  Enough said.
Anyway, you’re too smart to listen to stock tips.  That’s gambling!  We can’t afford to gamble with our present – or our future.  Be safe with the money you need soon.

But, how about “later” money?  The “don’t need it for ten years” money.   The “I’m not going to be poor when I’m old” money.
Let’s say you pulled your retirement money out of the stock market in 2009, and it’s in a FDIC insured money market account paying the highest rate in the country.  By the way, if you’re signed up for my eNewsletter, I’ll tell you how to find the highest rates in the country in your next edition.

Anyway, the highest rate your nice, safe retirement money can earn right now is .85%, almost one percent.
Since this is long term money, you’re going to have to subtract the amount your money loses in purchasing power when prices go up.  Prices DO go up, you know.  That’s pretty reliable, and it will happen for the rest of your life.

That loss of your purchasing power is called “inflation” and it’s now at 2.3%.  That means that it will cost you $102.30 to buy most things that cost $100 last year.

So when you subtract  0.85 minus 2.30, that equals negative 1.45.  That means that your safe investment is losing almost 1.5% per year.  That means that you have $98.55 this year to buy $100 worth of stuff.

And that will happen every year.

At this rate in ten years, you’ll have $86.41 to buy $100 worth of stuff.

Maybe that’s why twice as many of us live in poverty when we’re old.  We think we’re safe, but we’re not.

Make sure to tell your friends and colleagues to sign up for my free eNewsletter.  In the next edition, I’ll show you a simple way to earn the highest returns on your “I Need It Soon” money.

Stay tuned.

Mary Buffett

Why Safety is a Losing Strategy – Part II

Okay.  We agreed that ‘going to pieces’ is not what we do in any part of our lives, particularly when it comes to our long term investments.  Let’s be honest.  Some of us went to pieces during the stock market correction in 2009.  We sold.  And we put our money into something “safe.”  Now we know that’s a bad strategy.

But, wait a minute.  This market is lunacy.  A couple of weeks ago, The New York Times Sunday Business section headline was, “Is Insider Trading Part of the Fabric?”  It’s rigged.  The little guy doesn’t have a chance.  It’s too risky.  They still haven’t figured out what caused the Flash Crash.  And what in the heck is a flash crash?

All of these are perfectly understandable opinions.  But now you know that being “safe” is an absolutely certain losing long term strategy.
But, here’s something even more important.  Most of us earn less than men for doing the same job.  Most of us have taken some time off as an unpaid caregiver for family members during our working years.  Most of us put our kids’ education and our parent’s care before our own need for financial security.  Most of us will live longer than men.  It is absolutely necessary for us, not to just invest smart, but to be smart enough to overcome some difficult challenges.

Smart investing means that your long term investments absolutely have to grow faster than inflation.   And there are two places where long term money does grow faster than inflation:

The stock market and

Real estate

Both of these markets can be volatile.  I don’t have to tell you that.  You’ve seen them both go wild in the last couple of years.  What should you do?  Here are the secrets to long term investing.

Do whatever it takes for you to understand that the United States is the strongest economy in the world.  If you’re one of those people who thinks the Chinese economy is stronger, read this article. Be careful not to confuse size with strength.  This will help you not to panic.

Realize that markets are volatile in the short term.  Short term is five years.  Long term is ten or more.  If you’re investing in the stock market for ten years, looking at prices every day is just as ridiculous as buying real estate and having it appraised every week.

Stick to your plan.  Don’t bounce around with your strategies.  Equate your long term investing with raising teen-agers.  Be consistent.  Be committed.  Things will definitely get difficult, but this, too, shall pass.

Figure out a reasonable price for your investment.  For now, I’ll just say this.  facebook.  Nobody who looked at how much it’s making would have paid $38 a share.  More (much more) on this later.

We’ll talk about this much more in my next eNewsletter.  Tell your friends.  They’ll thank you.

Until next time…

Mary Buffett

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