Bankers’ Hours: Don’t bet the farm on a fad investment
Once again, we hear investors decrying their decision to bet the farm on the latest investment fad, lamenting that their kids’ college fund has disappeared.
The lure is irresistible to many of us, be it the Dot Com frenzy of the ’90s, real estate about every 10 years or, most recently, crypto-currency.
Specifically, the whine comes from investors who put all the marbles in cryptocurrency, only to see those marbles clanking down the drain as crypto values fell. Virtual currency operations are filing for bankruptcy, and others are freezing assets and blocking withdrawals while their young billionaire founders attempt to right the ship.
This isn’t a piece about crypto money, which I don’t understand, nor do I offer investment advice, which I couldn’t give because I don’t know much more about investing than I do about virtual bucks. But this column does, maybe, have an ace you can keep.
It deals with keeping the nest egg that you absolutely don’t want to lose in a safe place. Think “life savings,” or the kids’ college fund.
The founder of Celsius, an outfit that loans bitcoins to other crypto companies, and has now frozen investors’ assets, had T-shirts made that sported the slogan “Banks Aren’t Your Friends.” He’s absolutely right; banks are “for profit enterprises,” and they’re as focused on the bottom line as any other business on the planet. But, if a bank goes bust, the money that you have in your checking or savings account, or in a CD, is insured up to $250,000.
What this means is that you get yada, yada, yada from the execs at a failed crypto company, which will almost certainly translate into “nada.” In the instance of the busted bank, you get a check. And, as banks will assure almost ad nauseum, you can have multiple accounts for family members and spread your dollars around with different institutions to insure very large amounts.
The U.S. federal government does at least one thing very efficiently, unmatched except, possibly, by the hit on Osama Bin Laden. When an insured financial institutions fails, the suits show up at five p.m. on Friday, change the locks, send the executives home, and work the weekend to put the depositor payout plan in place to open for business on Monday morning. The Federal Deposit Insurance Corporation may operate the bank for a few weeks under a temporary name until it can move the deposits and loan assets to another bank, or that transaction may have been made over the weekend. Either way, as far as a customer is concerned, it’s business as usual: your credit and debit cards are working fine, your checks are clearing, and if you want to withdraw all or part of your money, you’re immediately handed a check, no questions asked.
In fact, an account, or accounts, in a federally insured bank, thrift or credit union could be the linchpin of a solid investment strategy. Once, way back in the last century, Mike Conviser, the chairman of the board at Aspen S&L, where I worked for 12 years, told me of a conversation he’d had with John Ma, a Manhattan investment advisor who numbered John Denver, the late folk singer, among his clients.
Mike said he asked Mr. Ma, “How do you enhance John’s investment portfolio?” Mr. Ma’s reply, as reported, was revealing.
“My job isn’t to enhance John’s wealth. He does that just fine by his earnings. My job is to preserve the principal.”
This concept gained some credence in my mind when, again in the last century, I asked someone who, unlike myself, did know a lot about making money from money, “What’s the first rule of investing?”
The reply: “Preserve the principal.” Probably meaning, don’t bet the life savings or the college fund on a fad or risky investment.
Then, me: “What’s the second rule?”
He: “Everybody forgets the first rule.”
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His email is firstname.lastname@example.org.
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