Tuesday, August 23, 2011

A Postscript: Even Wall Street Honchos are in CASH!

As we saw in the last blog, savers are under the gun what with the prospects of next to zero interest rates on their cash-fixed income savings. There are dire predictions afoot that the most diligent savers stand to lose, because of inflation eating away at their savings, and so they're being advised to take on some added risk. Well, one is justified in querying what the actual Wall Street Honchos, investors, traders, movers and shakers are doing with their own money. Are they following their own advice, or punking out? From the looks of things, the latter appears to be the case.

The eye-opener appeared in today's WSJ, p. C3, 'How Wall St. Invests Its Money in Hard Times'. It should also be an eye-opener to anyone who's turned on a Business or investing channel and been told by a green eyeshade type that "absolutely you must stay the course, and be in stocks"! Baloney!

The general tone of the article was that all the actual green-eyeshade types interviewed for the piece had their own money in "ultra-conservative" investments. According to one hotshot - an investment banker:

"I'm 80% in cash and Treasurys"

And the author notes this was a character who "in previous conversations hadn't failed to extol the virtues of complex derivatives"

Well so much for that! When the author asked the banker if he wouldn't now use some of those same derivatives in his own portfolio, he replied:

Not a chance! I don't want to take any risks!"

Fair enough, but if you guys - the wizards of finance - don't, why should any ordinary bloke?

Another guy, a member of big bank's management team, confessed that in the recent rash of market volatility he'd changed his allocations from 60% stocks and 40% bonds to a portfolio laden with U.S. government bonds and other investment grade paper (which usually refers to the "commercial paper" that appears in money market funds. In other words, this cat is as conservative as my wife and myself right now!

When the author of the piece pointed out that in order to change such allocations during the volatility the banker would have been selling in falling equity markets (hence, taking a significant loss), the guy actually responded:

"Right now, it's all about capital preservation. If I lose money in the process, so be it."

In other words, this whiz kid was so determined to get to safety he was prepared to sustain losses to change his investment allocations, reasoning a 4-10% hit on such a change was preferable to a 40% hit!

Of course, even as another acquistions banker is described as now veering "between pessimistic and very pessimistic" the author himself quickly reverts back to the norm of saying this isn't financial hypocrisy and little guys have no business following their example.

Really? How come?

The big difference between common folk and finance's upper echelons is that the latter already have a lot of money in the bank - from the cash portions of their bonuses and the sale of their shares in the good times. They don't really have to worry about their pensions. Most of us do. And we need high yielding investments to pay for them.

Again, bollocks! As I showed in the previous blog, one doesn't need the "risk of high yielding investments". Again, which is better? To lose (in the worst case scenario without making any adjustments to consumption) 4% a year to inflation, OR ...lose 40% every other year in a market correction, in which case you will never ever reach the breakeven point and will have to work until your 90?

People can make it without high risk investments, if they sustain a rigorous saving mode, no whim spending, period - then assemble enough to put into an immediate fixed annuity. Such regular monthly income, say $640 for an annuity taken at 65, with payment to beneficiaries for 10 yrs. in event of demise - can nicely supplement a Social Security check. It can also keep your money from running out, say if you have to regularly dip into principal to meet your IRS draw down obligations (an immediate annuity, once the computations are done, can meet the same requirements).

The choice, of course, lies with the average Joes and Janes. Do you want to try for an instant "jackpot" in Maul Street's equity markets casino (laden with risky, unregulated derivatives and flash traders)or will you commit to the slower, less sexy savings approach ending with preservation of sufficient capital to be used in the purchase of basic, no frills immediate annuities?

May I also remind readers, that they have been referred to as "dumb order flow" and "chickens to be plucked" by the Maul Street Street wizards and casino operators? Who, like the 'Wizard' in the land of Oz, never want you to see what actually goes on behind the curtain! Only to take their word that you need what they are peddling.

Need I say more?

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