This experiment began several years ago when I received a brochure in the mail advertising silver bullion coins as an investment vehicle. The “hook” was, “We will sell you two silver eagles for the price of one, if you agree to read our special report on silver.” When I saw this, I thought, “I could give one of these coins to a friend who was having money problems as a touch point for her prayers.” I sent her a coin and a notebook with instructions. Every day we prayed that the Lord would grant her wisdom in the area of finance. Every day she made an entry in her notebook.
The initial experiment was extremely successful. At the end of six months, her attitude towards money was radically different. She began to systematically eliminate her consumer debt. She changed some behaviors that were sabotaging her financial situation. Then towards the end of the six month experiment, she was able to move into her own home for the first time in her life.
Finally, when the participants are ready, they will give their coin with a blank notebook to a friend or a family member who is ready to change their relationship with money. In this way, friendship and blessings will keep flowing forward forever, even into eternity.
It was one of those back to the future moments. Recently I was studying some new material and for the first time in years I came across the venerable old idea of the investment pyramid.
Turn back the clock to 1979 or 1980. A very much younger version of yours truly and one of his drinking buddies were sitting at an all night diner sometime around 3:00 in the morning. This is not as suspicious as it sounds. Back in those days, we were both working the third shift. For God knows what reason, my buddy was all wound up about investing in the stock market. He pronounced it America’s game. He stated that all real Americans are obligated by birth to indulge in that great American pastime.
Although my friend has never played the game, I was suitably inspired by his speech to visit a broker with a small amount of what today I would consider emergency fund money in my hot little hand. The broker pulled out a flip chart lecture on the investment pyramid and proceeded to sell me $1,000 worth of a growth stock mutual fund that managed to break even about five years later.
The base of the classic investment pyramid consists of bonds, cash, and cash equivalents. The idea is that the closer to the base the larger the position; the closer to the capstone, the smaller the position. I think I would change this slightly. I would consider your primary residence as the base of your pyramid; then put bond funds, cash, and cash equivalents at the next level.
For the third level, I would include low cost index funds such as I hold in my Thrift Savings Plan or conservative hybrid funds such as Vanguard’s Wellesley Income (VWINX) or Vanguard’s Wellington Fund (VWLEX). I have been building positions in both for a couple of years. So far so good.
The next level above funds would include conservative dividend paying stocks such as my favorite happy story, Chevron (CVX). Most people consider positions in individual companies to be somewhat risky. This is true. However if you are holding positions in a pretty decent number of quality companies and no single position is more than 3% of your liquid net worth (excludes your primary residence), you’re probably going to be OK. I would put gold and other precious metals on this level. Most people would put gold closer to the capstone.
The fifth level would include your positions in small cap stocks, stocks or funds from the BRIC countries (Brazil, Russia, India, and China). If you like to dabble in technology, this would be a good level for your high tech positions.
The capstone, the smallest volume would consist of your hot tip and story stocks. If you would like to play with options, this is the kind of money you might use. These are goofy investments that might pay off big or might drop to zero (or close to zero). This is definitely gambling money, money you can afford to lose. I have consistently avoided high risk investments. It is a weakness in my style. That broker that sold me the crummy mutual fund, also tried to sell me a $500 position in a bankrupt mobile home manufacturing company that was in trouble with the Feds for selling solar water heaters that didn’t heat water. I wouldn’t touch it with a ten foot pole. It six months it was up 5 fold. Oh, well.
The rest of the story?
I decided mutual funds were for suckers. The salesman got his money up front. Then I had to pay a fund manager to lose money for me. I decided I would buy stock like I bought stereo equipment, the best product quality at the lowest cost. I bought $3,000 worth of Exxon. That was the last thing I bought for a long time. I lost my job at the saw chain factory, returned to engineering school, graduated, and paid off a house before turning once again to the great American game. During this time I was contributing to the Government version of a 401K but nothing else.
The Exxon dividend helped me with my college expenses. When I ran out of cash, I sold my shares in Exxon for a nice profit. This money also helped fund my education. As I mentioned at the beginning of the story, the mutual fund did eventually return my money and a bit more. After I graduated from engineering school, I sold it to help fund a damage deposit for an apartment near my new job in Maryland.
However you construct your investment pyramid, remember it is nothing more than a useful metaphor.
One more thing before you leave, Let’s be careful out there today.