Saving money and getting nothing in return: Does this make any sense? - Part 2
Looking for the best ways to save money? It's tough to come up with good ideas when interest rates are low - like they are now. Where do you put your savings? If you read my last post, you'll remember that I suggested you not "reach" for return. Here's a short story about what happens when you reach for return - even if you're a "sophisticated" investor.
About eight years ago, I worked for an investment firm that sold, among many other products, CDO's. Back then people thought they were good things. In fact, the market for CDO's in the U.S. was heating up. Everyone was scurrying about to get these products into the hands of banks, insurance companies and pension plans - supposedly sophisticated investors.
In addition, if you remember, interest rates were being cut by the Fed. It was post-9/11, the stock market was heading down, a recession loomed. Interest rates were heading down to zero - kind of like where they are now.
About eight years ago, I worked for an investment firm that sold, among many other products, CDO's. Back then people thought they were good things. In fact, the market for CDO's in the U.S. was heating up. Everyone was scurrying about to get these products into the hands of banks, insurance companies and pension plans - supposedly sophisticated investors.
In addition, if you remember, interest rates were being cut by the Fed. It was post-9/11, the stock market was heading down, a recession loomed. Interest rates were heading down to zero - kind of like where they are now.
CDO's promised higher "safe" returns. Besides, we were told by our European partners that CDO's were huge in Europe and the Middle East. It was one area where Americans weren't on the cutting edge of modern finance.
Wall Street called them safe. And for sophisticated investors looking to keep some of their money safe and liquid, they looked like one of the best ways to save money.
Without getting into the whole "what's a CDO" discussion, here's a quick description: they were investment vehicles that held stuff like junk bonds and shaky bank loans.
I just couldn't warm up to them. Why would anyone buy an investment that promised returns of up to 20% that consisted of a bunch of junk bonds and shaky bank loans? Of course, at the time, I just assumed I was either ignorant or unsophisticated, since everyone else seemed all fired up about the product. Maybe I was wrong. In any case, I stayed away from them.
Wall Street called them safe. And for sophisticated investors looking to keep some of their money safe and liquid, they looked like one of the best ways to save money.
Without getting into the whole "what's a CDO" discussion, here's a quick description: they were investment vehicles that held stuff like junk bonds and shaky bank loans.
I just couldn't warm up to them. Why would anyone buy an investment that promised returns of up to 20% that consisted of a bunch of junk bonds and shaky bank loans? Of course, at the time, I just assumed I was either ignorant or unsophisticated, since everyone else seemed all fired up about the product. Maybe I was wrong. In any case, I stayed away from them.
Then one day, I read this description from the brilliant David Fuller on his great Fullermoney.com website:
"A bank makes loans, and is sufficiently concerned about the risks of some of these that it securitizes them, hoping to sell this risk on to me in the form of a collateralized debt obligation. Why would I want to buy this product?"
Of course, I couldn't bring this up to the senior folks at my firm. Too much money was being made selling this stuff.
You probably know the rest of the story. Those sophisticated investors - banks, insurance companies, pension plans - bought tons of this stuff. They were "reaching for return." It worked for a few years. Then the you-know-what hit the fan in mid-2007. Most CDO's are worth pennies on the dollar. They're part of the reason that banks, insurance companies and pension plans have lost so much money.
If you want to know the best ways to save money right now, you may be better off sticking with those low-paying savings accounts and money markets - at least for the time being.
If you want to know the best ways to save money right now, you may be better off sticking with those low-paying savings accounts and money markets - at least for the time being.
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