Dear John: I have approximately $200,000 cash literally in the bank, sitting in checking accounts earning 1 percent interest. I will be receiving my yearly bonus in a couple of months, and that will increase the amount of cash to approximately $270,000. My wife is dead set against investing in the stock market, so I use a lot of my excess cash to pay down my mortgage. There’s about $310,000 left to pay off, at a rate of 3.125 percent.
I am keeping that $200,000 as a safeguard against getting laid off and not having any income for a while. And I don’t want to risk losing it. But it would be nice to make some profit off of it.
Do you think what we are currently doing — saving cash and paying off our mortgage — is sound? Or should I push my wife to get into equities?
Thanks. D.L.
Dear D.L.: Normally I would turn a question like this over to a certified financial planner. But I don’t have to, because I know the advice would be to diversify — stocks, bonds and enough cash to get you through several months of difficulty.
There — you have the conventional answer. But here’s my test for how to invest.
If you gained 20 percent on your investment by putting it in the stock market, would it make a difference in your life?
Now, if you suddenly lost 20 percent, would that make a difference in your life?
My point is, if you can’t stand the thought of losing 20 percent of your assets, don’t put them in the stock market. That’s especially true if having another $30,000 in the bank isn’t going to make you much happier or change your lifestyle.
The stock market is bubbling right now. You could make that 20 percent. But you had better get out of the market before things fall apart. And that means you had better keep one eye on the market at all times, because a downturn in stocks could come quickly.
Remember, 20 percent corrections in the market are nothing unique. They are normal, although there hasn’t been one for years.
What about investing in bonds? More dangerous than stocks. When interest rates rise, bond prices automatically will fall. So you can get stuck with big losses there.
What about “diversified” funds? Then you risk losing two ways, if stocks and bonds suddenly fall at the same time.
Now, what do I think about the mortgage? I personally don’t have one and haven’t for 20 years. And I like the freedom that allowed us.
If you listen to your wife and pay off the house, you will essentially be achieving a 3.125 percent yield on your assets — minus the tax deduction you will give up. So let’s say that mortgage is really worth only 2.5 percent after taxes. That’s still better than any other perfectly safe investment right now.
Of course, that 3.125 percent mortgage is going to look mighty cheap when rates go back to 5 percent. So the diversification that you might want to strive for is this: Continue to pay down the mortgage, but don’t pay it off. That’ll leave you enough cash to get into higher-yield fixed-income investments if rates rise.
Dear John: You keep saying the financial crisis was caused by Wall Street and nobody has been prosecuted. Where does Treasury Secretary Hank Paulson’s plundering of AIG to enrich Goldman Sachs — and consequently himself — fit into your picture of events?
To prosecute the perpetrators, the government would have to indict itself. And you know as well as me, that’ll never happen. R.L.
Dear R.L.: It is very clear to anyone who has done any research that there was a cozier-than-normal relationship between Washington and Wall Street during the 2007 and 2008 financial crisis.
And I might even buy the argument that it should have been that way. Washington was doing what was necessary to keep the financial crisis from getting worse, and Wall Street — because it suited its own interests — was more than happy to help.
I reviewed the phone records of Paulson during the crucial months of the crisis. Paulson, who came to the government from Goldman Sachs, had very few phone calls with Wall Street types for years before the crisis. Then the crisis came, and he was blabbering away not only with Goldman execs but with others in the financial community who clearly could have benefited from contact with him.
And when this all came out, through some work I did, prosecutors just shrugged. Oh, well!
I had an interesting conversation one day with a couple of federal prosecutors about this topic. They asked if I thought Paulson had benefited from any of this.
I said that I didn’t know (and still don’t), but clearly the people Paulson was talking with — and inevitably giving information to — were benefiting.
Prosecutors didn’t seem to think there was anything wrong with that.
You are right, the government didn’t want to investigate itself.
And that would all be fine with me if Washington abolished the laws against insider trading and all the other rules that apply to investor fairness.
It’s about equal treatment under the law: If one institution/person can get away with something because it/he is too big, too rich or too connected, then everyone should be able to get away with it.
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