The Little Book of Safe Money

Marketplace Staff Nov 20, 2009

The Little Book of Safe Money

Marketplace Staff Nov 20, 2009


TESS VIGELAND: When you’re settling down to bed at night, do you make sure that your front door is wide open? How about when you go to the ATM, do you yell out your PIN code as you’re punching those numbers? Of course not, right?

But plenty of investors did the equivalent in the stock market, throwing their money in all manner of unsafe places. And in his new book, author Jason Zweig warns that it could, and will, happen again.

Jason Zweig: “As sure as the sun rising in the east, Wall Street is forever promising another new-fangled way to promise higher yield at low risk, safety with more income or returns better than cash with no more risk. Any time, anyone tries to sell you any investment on premises like these, put one hand on your wallet and run for your life, you’re about to be snookered.”

Jason Zweig, reading from “The Little Book of Safe Money,” out this week. He’s also a personal finance columnist with the Wall Street Journal.

Jason, welcome back to the show.

Jason Zweig: Great to be with you Tess.

Vigeland: One of the first things you say in the book is this: “Investors can no longer count on rising markets and trusted relationships to bail out their portfolios for them.” Why do you think we ever trusted that in the first place?

Zweig: Well, the markets kind of trained people, I think, in the 80s and 90s, that the gods of the market would bail us out, even if we did foolish things. Often people learn the wrong lesson from their daily lives. We all can point to other things we do that we shouldn’t do. And I think people formed a lot of bad habits.

Vigeland: You do use the word “trust” and your book is, of course, called “The Little Book of Safe Money.” And you look back a year ago and people were questioning there was any safe place.

Zweig: Well, safety is, I guess, a bit like unicorns. We all want to believe in unicorns or UFOs, maybe, and we all want to believe in safety. There’s really no such thing as absolute safety. What the book is about, is not finding ways to keep your money absolutely safe; it’s about ways to keep your money safer. Not to provide them with certainties, because there aren’t any.

Vigeland: And as part of a way to do that, you have come up with what you call the “Three commandments of investing.” Can you go through those for us?

Zweig: Well, sure. I phrased them in biblical language, so I hope everybody can hark back to Sunday school or last weekend’s religious services and stick with us.

The first is “Thou shalt take no risk that thou needst not take.” What that really is a reminder of is that, first of all, not all risks are necessary. And secondly, whenever you do take a risk, you have to ask whether there’s a simpler, better way to do the same thing.

The second one, “Thou shalt take no risk that is not most certain to reward thee for taking it.” And here I’m not saying you should only take risks that are guaranteed to pay off. What I am saying is that it’s very important to make sure you ask, “What is the objective long-term evidence that it works?”

And then the third commandment is “Thou shalt put no money at risk that thou canst not afford to lose.” If you’re putting $430 into something, you need to ask yourself, “If I have zero at the end, can I live without the $430 that I started with?” And in a lot of cases, the answer’s probably “no.”

Vigeland: When it comes to safe money, there are more avenues than you can count, where your money is not safe. Yet we persist in giving our money to those avenues. Why do we keep buying into these things?

Zweig: Because they sound good. You know, Wall Street is not just a financial industry; it’s also a marketing industry. Wall Street knows that every investor looks in the mirror and sees Warren Buffet looking back at him or her. And the whole point of everything that is marketed is hope in a bottle. It’s “You can be rich with no effort.” Those marketing messages aren’t really going to make us richer either.

Vigeland: It seems like what all this really boils down to is that you need to keep it simple. If you can’t say it, you shouldn’t own it — like adjustable rate mortgages, ETFs, CDOs. Is it really a matter of keeping it as simple as you possibly can and perhaps that is the only safety there is?

Zweig: Simplicity is really important. And for most investors, it’s all that’s really necessary. Ultimately, what investments you own is less important than what kind of investor you are. And if you’re the kind of person who’s going to churn your own account and trade as if your underpants are on fire, you’re not going to get very good results in the long run, no matter what you own.

You have to be the kind of investor who deserves the kinds of returns you want. And instead of being greedy when markets are going up and fearful when markets are going down, you have to have the character to stand what you believe and make your own judgments about which investments are attractive, instead of letting the mandess of other people tell you what to do.

Vigeland: Jason Zweig’s new book is “The Little Book of Safe Money.” It’s out this week. He’s a good friend of the program, also a columnist with the Wall Street Journal. Jason, thanks so much for coming on the show and happy holidays to you.

Zweig: Tess, the same to you and a pleasure as always.

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