Even Low Risk Can Be High Risk in Dangerous Times

Nowadays, many people are looking for easy answers. They want a pill, a device, an easy routine -- something that can help them solve their problems with a minimum of effort.

The same holds true when it comes to personal finances and investing. No small number of individuals and families want a low-risk, high return approach that doesn't require much effort or take too much time.

Unfortunately, even in the best of circumstances, such approaches don't exist. Something can always go wrong, no matter how protected people think they are.

And in a dangerous environment like we have now, even decisions that might seem to involve little risk can prove very costly if a full range of potential threats is not taken into account.

For some insights on this particular issue, consider the question raised in a post at Jesse's Café Américain blog, entitled "Where Was the Safe Place for Savings from 1929-1933?"

The answer is that there was NO single safe place for your savings, not even 'cash' dollars thorughout the three years that marked the stock market crash of 1929-1932. The individual had to use their minds and keep their eyes on the markets to steer through that most perilous of financial times.

Many believe they understand the coming debt deflation and know where THE safe place will be to put their savings. History suggests they may be consumed for their faith in theory rather attention to market reality.

And this was a relatively straightforward case of unwinding and deflation. What twists and turns does this brave new world of derivatives and fiat reserve currencies have in store for us as it unwinds? And what new policy errors unforeseen and consequences unexpected await because of the Fed's continual experimenting in the markets?

We'll be talking more about this in the days ahead.

Comments

[Edward Charles Ponzi Jr]

The safest portfolio would be 50% canned goods and 50% ammo.

I try to balance deflationary and inflationary risks -- my real portfolio is about 1/3 short equities about a 1/3 long positions like oil, uranium, gold, silver and about a 1/3 money -- some non-US (yes -- gold is money too) -- it's not quite that neat -- but the idea is balance and hedging as opposed to the usual concepts of "diversification".

[PDamian]

But the original question was about savings, not investments. Frankly, I have the same question. Along with a 403(b) and other retirement investments, I keep a savings account and a number of CDs stashed away for emergencies (if the emergency never comes, I'll use them in retirement, I guess). I constantly wonder if I'll be able to access those funds should a national panic take place. According to Bankrate, my bank's health is fine ... but will any bank be safe, come the financial apocalypse? Short of a coffee can in the back yard, where's a good place to keep cash?

[vividvew]

>No small number of individuals and families want a low-risk, high return approach that doesn't require much effort or take too much time.

forget high return. hell forget any real return. I'd settle for any simple, low risk, investment strategy that protects(not even grows) my purchasing power. This is no simple thing for people like me who hate doing the monthly bills, never mind figuring out how to balance long term investments.

I am perfectly willing to earn my money and do not expect "my money to make money". I am young, well educated, make decent money, keep my debts low, earn more than I spend, and just want the purchasing power of my long term savings protected.

From my point of view these seem like very reasonable expectations; apparently not.

>I constantly wonder if I'll be able to access those funds should a national panic take place.

Agreed!
If I could trust CDs, savings accounts, my 401K, or any other simple investment strategy that does not require active management, I wouldn't have to bother with the ridiculous complexities of trying to be truly "diversified". I fear that if things implode instead of slowing decoupling over 5-10 years, all my amateur efforts to protect my savings could be washed away.

How do you protect from the possibility of severe systemic shock!?

[Luddite]

To PDamian
I had some money in a brokered deposit with Columbian B & T (went bust 8/24)
Bankrate had them at a 3 stars - 3 CAEL which is the midpoint of their ratings. Not sure how long it will take to get my money from the FDIC but at least you get it back. Stay under FDIC limits

To Vividvew
No answers for you but keep doing what your doing (work hard, save, avoid debt)
Just remember sometimes you can be on the right track but still get hit by a train. Good luck -- you sound like a solid citizen

[Blissex]

«No small number of individuals and families want a low-risk, high return approach that doesn't require much effort or take too much time. Unfortunately, even in the best of circumstances, such approaches don't exist.» Crazy negativism -- of course one such approach exists: houses bought with zero down, 110% LTV loans. House prices only ever go up, and if you pretend that you live in the house any gains are tax free too. Ask any real estate agent! :-)