Dear Bridget,
In the 70s, when I was in high school, I shared a Pinto with my sister. She bought the gas, I bought the oil. When the BP crisis hit, inspired by the exhilaration of getting the Pinto up to 60 mph with the windows open, I bought some shares. I
know it's a risky investment.
I'm wondering what I can buy on the conservative side to balance my wild freewheeling. Maybe my angst is out of line,
but I would like to buy something that will most assuredly maintain its value. I'm not
impressed with the interest rates offered by FDIC-insured cash accounts. I've heard some gold talk, but it seems like a big step into the back-alleys of
commissions and swindlers.
I am a regular reader and follow your advice closely to maintain some savings.
Pinto Inspired
Dear Inspired,
I love your reasoning for buying BP!
Pretty much all researchers, including Nobel-prize winners,
conclude that you can't "beat the market." In other words, no
one can reliably pick stocks that will make more money than the
market. Still, some people have an emotional desire to pick
stocks, and there's nothing wrong with that. Just be smart.
I suggest that you hold your stocks in a separate "fun money"
account. Don't let the account grow to over 10% of your total
portfolio. When the value of your "fun money" grows to over
10% of your total portfolio, transfer some to your other
accounts to bring it in line.
Never add money into your "fun money." If it runs out, then
you're stock picking days are over. You're done.
For the other 90% of your money, design a well-diversified,
tax-smart, low-cost portfolio.
Since you ask specifically about investments that are not
risky, I suggest US Treasuries known as "strips" as part of your portfolio.
You can buy these through your broker (like Schwab or Fidelity) or from US
Treasury Direct. Currently a buying a treasury strip that
matures in 2026 costs approximately $5,470 and will pay
$10,000 in 2026. That's a yield of around 4%.
Any financial professional who earns money based on
commissions will discourage you from this strategy. They
earn little if any commission on US Treasuries. "Oh, the
yields are so low," is what I've heard. In fact, treasuries
protect you against deflation, because even if prices on
everything start dropping, in 2026, you'll get your $10,000.
Plus, the yields on treasuries always seem low. You're buying
them because they're safe and earn more than a CD, not to try
to out-earn BP. The yield seemed low when I bought US
Treasury Strips in early 2008, but seemed brilliant a year
later.
In fact, for clients and for myself, I build what is known as
a treasury bond ladder for retirement. The ladder is designed
to have a set amount of treasuries maturing each year. This
creates what amounts to a guaranteed paycheck during
retirement.
You also ask about gold. You don't invest in gold; you
speculate on gold. Gold grows in value when someone else will
speculate more wildly than you did when you bought it. Some
people want gold in case all hell breaks loose. It makes them
feel safe. They like the option of being able to make a run
for it with their gold stash. I like feeling safe, too.
If you're in this camp, you could use 1-2% of your portfolio
"fun money" to buy some gold. Take physical custody of it;
put it in your safe at home. Buy enough to get you over the
border, and remember the practicalities you are trying to plan
for; small coins will probably work best. You don't want to
be stuck trying to get change for $1000 gold bars when the
banks have closed.
To take the next step down this road, add the following to
your safe: guns, ammo, water, and copy of your favorite Mad
Max movie. If you can't watch Mel Gibson anymore, I thought
The Book of Eli was okay and 2012 was even better. However,
none of these movies feature a post- apocalyptic gold
standard. According to them, if all hell breaks loose,
you'll want guns, ammo, and perhaps a jet.