Thursday, June 28, 2007

this ain’t your grandma’s financial market

Dave Ramsey often says if you do poor people things then you get poor people results. If you do rich people things then you get rich people results. In grandma’s day people of modest means had limited investment opportunities for their savings. Basically savings accounts and savings bonds. Neither achieve very good returns, usually just enough to cover inflation and maybe a bit more. Individual stock holdings were risky and often not very appropriate since people of modest means often did not have enough money to diversify their portfolio.

Life insurance policies were another alternative but they were not much better than savings accounts. These “whole life” policies and their modern off-spring (universal life, variable universal) are no longer, if they ever were, good alternatives.

That is, most folks were stuck getting poor people results.

Today people of very modest means have access to investments available only to the rich in grandma’s day. Money market mutual funds give anyone with even a couple of hundred dollars the ability to get the returns of jumbo CD accounts that otherwise require deposits of $100,000 to $1,000,000. Mutual funds of stocks or bonds allow risk-minimizing diversification as well as professional management. Instead of buying a savings bond with chump returns, a bond fund can give the higher interest obtained from a $10,000 government bond. One can even purchase mutual funds that give balanced portfolios of stocks and bonds.

It is really quite remarkable how our entrepreneurial economy has developed financial innovations that allow benefits, once available only to the rich, to flow to wage earners. These innovations allow anyone to actually build wealth rather than just preserve savings.

Financial investments in savings bonds, any type of account at a bank, or whole/universal life policies are now for chumps who want poor people results.

You can do rich people things and get rich people results.

Be blessed!
RB

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