Saving and Investing Safely

The magnitude of the amount lost in the Legacy Group pyramiding scam in the Philippines at P18 billion, and the Madoff pyramiding scam in the U.S. at $50 billion stagger the imagination. As of the last reckoning, the reduction in value of the world’s financial assets (stocks, bonds, derivatives, mortgage loans, etc.) is at $50 trillion, about $10 trillion in Asia, and $20 trillion each in Europe and the U.S.A. This perception of lost investment and savings is what is depressing or reducing the world’s purchasing power, as the people who have lost assets are no longer comfortable spending. They no longer have the perceived value of these assets in the back of their mind, so they tend to spend less. Since they can no longer cash-in the value of these assets at the prices prevailing before the financial meltdown, they really have lost their purchasing power.

Some people asked me, “If these values are lost, who gained?” or “Where did the money go?” This is the Zero-sum game concept, which says that for every winner, there should be a loser, so that the pluses and minuses will always equal to zero. However, unlike in a Casino, or a mahjong game or even in lotto, where what is lost is gained by other parties, at the end of the day or the game, the financial and investment market is played over a longer period of time. In a period of rising prices of financial assets, almost everybody will win, but in a period of declining financial asset prices, like the current meltdown, almost everybody will lose. It is still a zero-sum game but over a longer period of time. The good and safe saver/investor is the one who made money while the prices were up but did not lose money or lose the least when the prices went down.

The whole point of saving and investing is to provide for the future, in terms of regular cash inflows and capital appreciation. It is a double whammy when you lose cash inflow and also your capital, as what seems to be happening to the victims of Legacy and Madoff. Those who lost money in legitimate financial instruments are luckier in that, they probably have some of the cash inflow and their capital, although lesser in amount and in value. Then, there is a possibility that these cash inflow and value will go up in the coming years as the financial markets recover.

How do we prevent getting into the same financial debacle in the future? The same advice I’ve given to clients and friends years before, I will repeat: diversify your savings and investment into different assets and institutions. I have worked in a number of financial institutions, and even if I were or am in top management, I have never advised anybody to put all there deposits or investments with the bank where I work. I tell them to put it in at least 4 banks. I have also advised them to put them in Bonds, Stocks, Property, Mutual Funds, Insurance, Annuities, and even Jewelry; and if substantial enough, even in other currencies and other countries. Those who heeded this advice lost the least in the current meltdown and maintained their lifestyle.

For those who lost money on the pyramiding scams, let me give you these parting words,” the principal should always be larger than the interest.”

To lighten up your mood, let me share with you some of the best financial meltdown jokes:

1.         The problem with the balance sheets of investment banks is that nothing is right at the left side and nothing is left at the right side.

2.         P/E Ratio - is the percentage of investors peeing on their pants as they watch their stocks go down in price.

3.         CEO- stands for Chief Embezzlement Officer.

4.         CFO – Corporate Fraud Officer.

5.         Broker – what your financial adviser and broker had made you after the meltdown.

6.         Cash Flow – the sound of your money going down the drain as your investment disappear.

7.         Standard and Poor – this is what happened to most investors up to now.