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Question: We don't know what to do with that money. It's our cash reserves. But we need somewhere really safe because we are afraid of the stock market.
February 2011
Question: My husband and I spend about $3,000 each month. We have $40,000 in a CD and $20,000 in savings, and the interest rate is low on both — 0.4%. We don’t know what to do with that money. It’s our cash reserves. I know I could put $50,000 somewhere for five years because I save every month and don’t need the cash. But we need somewhere really safe because we are afraid of the stock market.
Ric: I once had a guy come to our home during a dinner party who said, “I’ve never before tasted alcohol, because I’m afraid of getting drunk. Give me a bottle of scotch so I can chug it!"
Do you realize you’re that guy?
You have your life’s savings in very conservative investments because of fear, and for some reason you believe that doing anything different requires you to do something different with all your money (okay, 83% of it). Not only that, you think your only choice is to do something very risky with that money.
Why is it you think you must go directly from abstinence to alcoholism?
So let’s start over — because you’re doing two things wrong, one strategically and one philosophically.
Strategy first: You should retain in the bank an amount equal to one or two years’ worth of spending. Since you spend $3,000 per month, you should mantain in cash $36,000 to $72,000. So you should either keep all your money in the bank, or at most move $24,000 (that's merely half of the amount you were considering) to other investments. By investing this smaller amount, you should be able to feel more comfortable with your decision.
And that leads to the philosophical issue: Just because you move money from bank accounts doesn’t mean you must move it to stocks. There are many asset classes — and stocks are only one of them. You’re afraid you’ll lose whatever you invest, as though your only investment options are lottery tickets. So change your point of view: All investments (even your bank accounts) have risks, so by buying many investments, you reduce the worry that you’ll suffer big losses if one of the investments falls in value.
I suggest you read The Truth About Money. It’ll help you gain a more educated view of investments, in the context of financial planning. It’ll help you make better decisions. In the meantime, leave your money where it is, because you’re not yet ready — strategically or philosophically — for doing anything else.
And I wouldn’t be surprised to hear that, after reading this, you decide you need a stiff drink.
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