Gyroscopic Investing

http://www.cnbc.com/id/101157290

Wealthy families have about 39 percent of their assets in cash, according to a recent poll of more than 50 large family office representatives from 20 countries conducted by Citi Private Bank.

Stocks represented about 25 percent of portfolios on average

Bonds were about 17 percent of the asset mix

various classes of less liquid and alternative investments amounted to 19 percent.

"Using these weightings, our own return expectation for the portfolio … comes to just 4.4 percent.

Hmmmm sounds familiar.

They're probably waiting until they come across a really tempting investment that represents an incredible opportunity but requires a lot of upfront cash. Real estate undervalued by millions, failing companies easily turned around, valuable art auctioned off at short notice, etc.

Pointedstick wrote: They're probably waiting until they come across a really tempting investment that represents an incredible opportunity but requires a lot of upfront cash. Real estate undervalued by millions, failing companies easily turned around, valuable art auctioned off at short notice, etc.

Transactional value of cash

Wealthy folks get this concept.  You never get anything at a highly profitably price in a good economy.  When things are in the dumps though, you buy it all.

But where is the cash?

In a savings account? short term bonds? in a bank vault?

In this day and age, cash is rarely "cash".

There are two types of rich.  Some people are "high income" newly rich which means they have a lot more income coming in than most people but have not yet accumulated a lot of assets, while others are "high net worth" which means that they've managed to save a lot of money (or were given it somewhere along the way).  For a variety of reasons, the truly wealthy in both categories invest pretty conservatively.

Many of those who are "nouveau riche" - or the "new rich" have only recently come into high income.  They are often business owners who have finally hit it big with their business but will invest conservatively until they have a large slug of weath stored up because they (1) Know that their recent high business income may not continue and (2) Need cash on hand for emergencies if the business gets into trouble.  So they sit on cash and invest modestly.

In contrast the "old rich" or high net worth individuals have a substantial nest egg which they either spent a lifetime building, or perhaps inherited somewhere along the way.  Not surprisingly these people are more concerned about preserving their wealth (which is already substantial) than trying to grow it at 20%/year.  They also invest conservatively since they already have more than they will likely spend for the rest of their lives.

One of my friends is in the first category - after 20 years of playing with side businesses he has one that hit it big and now generates a lot of income.  He's rapidly building his nest egg now, but still lives modestly - you would not know he nets nearly a million a year.  He drives an eight year old car, and wears jeans and a t-shirt most days.  His investments are pretty conservative - he wants cash on hand to build the business, handle emergencies and as a hedge if the business suddenly turns south.  Most of his stocks and bonds are in his retirement portfolio.

In contrast, one of my roomates from College is "high net worth" - he has a large nest egg he's built over 30 years, and has made some incredibly smart stock investments.  He also lives very modestly.  When I ask him what he's invested in now he says "triple tax free bonds".  He explains that he's not interested in really growing his nest egg anymore as he already has more than he could possibly spend - he just wants to preserve what he has.

I will add that many of my friends that are into "riskier" investments are not truly rich!  Some have nice cars, nice houses, and a good income but also have a high debt balance (credit cards, double mortgages, etc) that comes along with chasing the American dream.  They also trend towards the hottest stock or investment advisor rather than choosing a simple sound investment strategy and sticking with it.

So to sum it up (my post is already too long) I'm not surprised at all that the rich carry a lot of cash.  Over 80% of millionaires are small business owners, and they have a very healthy respect for cash.  Many of the others are "old money" who are working to preserve what they have, and also understand cash.  Most of these people did not get there by clipping coupons or buying Apple stock at just the right moment.

In contrast many with regular jobs get caught up in the earn-tax-spend-debt cycle and market timing, chasing hot stock tips, etc...and never really accumulate much cash at all.

Pointedstick wrote: They're probably waiting until they come across a really tempting investment that represents an incredible opportunity but requires a lot of upfront cash. Real estate undervalued by millions, failing companies easily turned around, valuable art auctioned off at short notice, etc.

Sounds like they missed the big fire sale in stocks back in 08-09.

Rien wrote: But where is the cash?

In a savings account? short term bonds? in a bank vault?

In this day and age, cash is rarely "cash".

The wealthy, which for purposes of discussion I will define as those with a net worth of $10 million or more, generally stash their cash in STTs and FDIC insured short term instruments.

Ad Orientem wrote:

Rien wrote: But where is the cash?

In a savings account? short term bonds? in a bank vault?

In this day and age, cash is rarely "cash".

The wealthy, which for purposes of discussion I will define as those with a net worth of $10 million or more, generally stash their cash in STTs and FDIC insured short term instruments.

So they are not really in cash then. They are in bonds. They are thus exposed to the risk of default and rising rates. While one may argue that short term paper is less risky (which is true) this risk rises as long as they keep rolling forward. They could almost as well be in longer term paper. The protection of short term paper is then largely illusory.

Rien, I'd like to know what you're thinking about when you talk about default-free cash. Banknotes can be defaulted on, too. That happened a lot in many places in Europe.

k9 wrote: Rien, I'd like to know what you're thinking about when you talk about default-free cash. Banknotes can be defaulted on, too. That happened a lot in many places in Europe.

I do not know of any case where a banknote was defaulted upon. But they can become worthless through (hyper)inflation. Is that what you meant?

Btw I never used the term default-free cash.

AFAIK, it never really happened in the US, and you can still pay with bank notes emitted before WWI if you like, right ? That's not the case in many parts of Europe, especially where the € has been introduced, since new banknotes (with a very different design) are often produced and are supposed to replace the old ones. When that happens, you have a few years to change your old banknotes until they lose all value (except for collectors, obviously).

Very personal anecdote : my grandmother used to hide cash everywhere in the house, but she never told anybody. When she died, we found a lot of old banknotes that had become worthless ; the equivalent of, I think, 1000 of today's US$. I said very personal but that happens quite often (you can read that in the news from time to time : "heirs found millions of F in their grandma's house ; too bad, they're worthless now, ha ha ha").

There are a few reasons, too, where a government wants to make some banknotes worthless, for political reasons. A few examples :

During WWII, in France, some people have earned 1000 F notes on the black market ; 1000 F was a lot of money, and the average Joe wasn't used to seeing them, especially on such hard times. So, after the war, a law said that those notes were about to be declared worthless by the central bank. You had 2 weeks to bring them back, and only 2 notes could be brought by a given person. Lots of people lost in 2 weeks huge amounts of money they had earned on the black market in the previous years (well, nobody was sorry for them, but that's not the point).

More recently, and more of an anecdote, but it really makes you think about hoarding actual cash and think it's safe. Italy is now part of the Euro-zone, so, like any other country who switched to €, they said their citizens "you have n years to change your old Lira notes for the new Euro notes". The deadline was supposed to be 2012, something like that. But, all of a sudden, in the middle of 2011, a law was voted, that said : "oh, we were supposed to give you euros against your liras, remember ? Well, we won't ; sorry, your liras are now worthless, too bad". Lots of people were still keeping small amounts of liras, for a reason or another, and all of a sudden the Italian central bank defaulted on these notes.

mortalpawn wrote: I will add that many of my friends that are into "riskier" investments are not truly rich!  Some have nice cars, nice houses, and a good income but also have a high debt balance (credit cards, double mortgages, etc) that comes along with chasing the American dream.  They also trend towards the hottest stock or investment advisor rather than choosing a simple sound investment strategy and sticking with it.

This is because they are investing for maximum return.  They want to invest their way to a higher standard of living than their current salary/savings rate will allow (possibly at the expense of not being able to maintain their current standard of living). It's an investing strategy driven by greed rather than careful planning.

Pointedstick wrote: They're probably waiting until they come across a really tempting investment
...
valuable art auctioned off at short notice, etc.

Hmm, maybe Cornelius Gurlitt will run out of pizza money again soon.

k9 wrote: More recently, and more of an anecdote, but it really makes you think about hoarding actual cash and think it's safe. Italy is now part of the Euro-zone, so, like any other country who switched to €, they said their citizens "you have n years to change your old Lira notes for the new Euro notes". The deadline was supposed to be 2012, something like that. But, all of a sudden, in the middle of 2011, a law was voted, that said : "oh, we were supposed to give you euros against your liras, remember ? Well, we won't ; sorry, your liras are now worthless, too bad". Lots of people were still keeping small amounts of liras, for a reason or another, and all of a sudden the Italian central bank defaulted on these notes.

Ah, I never heard of that one.
Technically that is probably not a default, but it is as good as a default. However, the lira's have been retired since 2002 (?) so people held on to lira's for almost 10 years without being able to buy something for it? Strange behavior, but then again, some people are like that.
Btw: Its not as if Italy would ever go back to the old lira. They may go to a new lira, but even then the old ones would be worthless.

rhymenocerous wrote:

mortalpawn wrote: I will add that many of my friends that are into "riskier" investments are not truly rich!  Some have nice cars, nice houses, and a good income but also have a high debt balance (credit cards, double mortgages, etc) that comes along with chasing the American dream.  They also trend towards the hottest stock or investment advisor rather than choosing a simple sound investment strategy and sticking with it.

This is because they are investing for maximum return.  They want to invest their way to a higher standard of living than their current salary/savings rate will allow (possibly at the expense of not being able to maintain their current standard of living). It's an investing strategy driven by greed rather than careful planning.

And maybe some desperation? For most people, it might seem pretty daunting to build up enough of a nest egg so you can retire at 65 (or at all).

k9 wrote: citizens "you have n years to change your old Lira notes for the new Euro notes". The deadline was supposed to be 2012, something like that. But, all of a sudden, in the middle of 2011, a law was voted, that said : "oh, we were supposed to give you euros against your liras, remember ? Well, we won't ; sorry, your liras are now worthless, too bad". Lots of people were still keeping small amounts of liras, for a reason or another, and all of a sudden the Italian central bank defaulted on these notes.

In the end the deadline was less than 3 months early, but I can imagine how unsettling that would be to someone who thought they still had time to cash in those notes.

MangoMan wrote: The basic problem here is people making plans based on the gov't's rules, and then the gov't changes the rules without warning and you are screwed. This is Dilbert's world. So to all of you who have Roth IRAs, caveat emptor.

All you can really do is diversify. That means having tax-free investment accounts, tax-deferred investment accounts, and taxable investment accounts.

dualstow wrote:

k9 wrote: citizens "you have n years to change your old Lira notes for the new Euro notes". The deadline was supposed to be 2012, something like that. But, all of a sudden, in the middle of 2011, a law was voted, that said : "oh, we were supposed to give you euros against your liras, remember ? Well, we won't ; sorry, your liras are now worthless, too bad". Lots of people were still keeping small amounts of liras, for a reason or another, and all of a sudden the Italian central bank defaulted on these notes.

In the end the deadline was less than 3 months early, but I can imagine how unsettling that would be to someone who thought they still had time to cash in those notes.

Yes, indeed, 3 months out of 10 years seems like nothing. But in practice the deadline was changed from "in 3 months" to "today" ; this was problematic for French shop owners that were close to the border and who used to still accept payments in liras and were thinking about changing them just before the deadline (moving even to the closer Italian city is a loss of time & money, so you better have a good stash of money to change).

Pointedstick wrote:

MangoMan wrote: The basic problem here is people making plans based on the gov't's rules, and then the gov't changes the rules without warning and you are screwed. This is Dilbert's world. So to all of you who have Roth IRAs, caveat emptor.

All you can really do is diversify. That means having tax-free investment accounts, tax-deferred investment accounts, and taxable investment accounts.

Well said. That's exactly what I've done since I started following this forum and reading/listening to Harry Browne's material.

Prior to that, virtually none of the investing and personal finance advice I had read even mentioned the possibility of the government reneging on its promises regarding tax-advantaged accounts.

Learning about that possibility really opened my eyes and helped me realize that diversification across tax-deferred, Roth, and taxable accounts is likely safer than putting all of one's eggs in one basket.

MangoMan wrote:

Pointedstick wrote:

MangoMan wrote: The basic problem here is people making plans based on the gov't's rules, and then the gov't changes the rules without warning and you are screwed. This is Dilbert's world. So to all of you who have Roth IRAs, caveat emptor.

All you can really do is diversify. That means having tax-free investment accounts, tax-deferred investment accounts, and taxable investment accounts.

In this situation, if you are in a high enough tax bracket now, take the money [tax break] and run. A bird in the hand is worth two in the George Bush [or BHO]. I will happily take whatever is available now vs a future promise that is as good as the word of our politicians.

Or, in other words, "I'll gladly pay you Tuesday for a hamburger today."