The Little Book of Safe Money

Jason Zweig, “The Little Book of Safe Money: How to Conquer Killer Markets, Con Artists, and Yourself”, John Wiley & Sons, Inc, 2010, 230 Pages

Jason Zweig is, among other things, the Personal Finance columnist for the Wall Street Journal. This most recent book of his is an excellent, short and concise guide to financial literacy. Well worth reading. My notes are below.

• Diversification and liquidity are essential, yet the both vanish during a financial meltdown such as that experienced in 2008. This is why a generous dollop of savings must be maintained in a cash type account.
• Money-market funds are required by U.S. regulations to maintain an average overall maturity of 90 days, meaning that most of their return comes from securities with lives of three months or less. This makes them quite insensitive to short term interest changes.

• Pg. 22: There are two kinds of capital involved in personal investing: your financial capital (investments) and, most important, human capital (yourself). This last is not appreciated. For example: picture an auto worker in Detroit, investing heavily in the auto industry, and living in house he purchased in this city highly dependent upon one industry, autos; the same industry his job is dependent on. This is not diversification. For instance: anyone living and working in a community highly dependent upon the industry he works in, may be better served by renting.

• There is no reliable evidence that holding stocks long-term will always exceed the value of holding bonds long term. The historical evidence & financial publications that continue to publicize this as fact are apparently not considering that this alleged superior return can only be derived when only the survivors are in the calculation (survivor bias).

• Pg. 41: The basic principle of managing your cash sensibly is that you should match the horizon of your assets (the cash) with that of your liabilities (whatever you plan to spend it on). If you will need to spend the money within a year or so, then you should keep it in a government-insured bank deposit or money-market mutual fund. If need in one to five years, a certificate of deposit could make sense. For spending needs five years or more in the future, Treasury Inflation-Protected Securities (TIPS), are almost certainly the best bet.

• If you are not in your late 50s it makes no sense to keep any 401(k) money in a money-market fund. However, TIPS for this person are fine in a 401(k).

Pg. xxii: From the U.S. stock market peak on October 9, 2007, to its trough on March 9, 2009, investors lost $11.2 trillion. Another $14.7 trillion went up in smoke elsewhere around the globe. In 17 murderous months, 60 percent of the world’s stock market wealth was destroyed.

Pg. 56: During the deflationary slog of the Great Depression (1929…) as the cost of living dropped an annual average of 8.6 percent from the end of 1929 through the end of 1932, stocks lost an average of 26.9 percent per year—while intermediate-term Treasury bonds gained 4.3 percent.

Pg. 5: The ideal portfolio is solid and liquid at the same time. An investment is solid if decades of historical evidence indicate that it is highly unlikely ever to lose the vast majority of its market value. It is liquid if you can convert it into pure cash any time with minimal loss of listed value. There is nothing inherently wrong with having some of your money in illiquid assets; they often have higher returns in the long run. But it is absolutely mandatory for you to keep liquid enough assets to cover one year of expenses.

Pg. 35: The original money market fund Reserve Primary Fund was heavily invested in securities issued by Lehman. Because Lehman’s bankruptcy caught Reserve by surprise, it became the first money market fund to “break the buck”—investors were told they would only get 97 cents per share. The results were drastic. In one of the fastest panics in modern financial history, investors yanked $123 billion out of money-market funds in the ensuing two weeks.

Pg. 39: Any money-market fund with annual expenses of 0.5 percent or higher is too expensive; in fact, you should be able to find ample choices at 0.25 percent or less.

Pg. 77: How should you pick stocks to invest in? Benjamin Graham had three worthwhile insights, assuming the individual is willing and able to do all the homework, otherwise, that person should just buy diversified index funds:
1) You must focus on business value, not on stock price.
2) You must understand Mr. Market.
3) You must maintain a margin of safety
Pg. 91: As of 2007, the typical American household spent an annual average of:
$10, 023 on rental or mortgage and other housing costs.
$3,465 eating at home
$2,668 eating out
$3,477 on utilities.
$2,853 on health care.
$2,698 on entertainment (including $987 on consumer electronics).
$2,384 on gasoline and motor oil.
$538 on public transportation.
$457 on alcoholic drinks
$323 on tobacco.
$446 on furniture.
$1,881 on clothes
$327 on shoes.
$140 on laundry supplies.
The full list is available at: www.bls.gov/cex/

Pg. 122: Altogether, the return of the average hedge fund may be overstated by a shocking margin: as much as eight percentage points per year. (Obscene fees, Survivorship bias, Backfill bias, and Look-ahead bias)

Pg. 143: Based on decades of data from 53 countries, economists have found that the economies with the highest growth produce the lowest stock returns. Stocks in countries with the highest economic growth have earned an annual average return of 6 percent; those in the slowest-growing nations have gained an average of 12 percent annually.

Pg. 171…Psychological problems with investing: anchoring, framing, halo effect, prediction addiction (see patterns everywhere).
Identify financial planners who charge only fees: www.napfa.org; to find certified public accountants who are also qualified to provide financial advice: http://pfp.aicpa.org
To check whether a bank or credit union that claims to be federally insured actually is:
www.fdic.gov/deposit/index.html
www2.fdic.gov/idasp/main_bankfind.asp (for banks)
www.ncua.gov/indexdata.html (for credit unions)

The Municipal Bond Tax-Equivalent Yield calculator at www.dinkytown.net
Two trustworthy web sites that offer links to banks and credit unions with the highest available rates are:
http://bankdeals.blogspot.com/
www.checkingfinder.com

(Another site, www.bankrate.com also offers good information but is more commercial and harder to navigate.)
To check on your child’s 529 plan allocation vs other plans: www.collegesavings.org