Y2K All Over Again

A friend of mine called me last night and said three people at his company had told him they were taking cash out of the bank and literally stashing it at home.  He asked me if I thought he should do this?  My obvious answer was no.  But, at that moment, it dawned on me that this is like Y2K.  Do you remember the fear in December of 1999?  Do you remember the panic?  That’s where we are right now.  Do you remember how silly those same people looked when January 1st, 2000 everything worked fine and they had 50 gallons of water in their house, rolls of duct tape, & mountains of canned goods?

This isn’t just a money issue.  It’s a confidence issue right now.  People are freaking out.  And, to be honest, I don’t blame them.  Borrowing costs for banks is skyrocketing.  Treasury rates are falling as investors seek safety.  Banks are failing.  Banks aren’t lending and they aren’t borrowing.  Stocks and bonds are falling.  And, our economy is probably in a recession and it’s going to get deeper.  So, they have reason to be scared.  But, to start stashing cash?  That’s going overboard.  Let’s be clear.  Things are serious.  They need to get a deal done very quickly.  But, this isn’t the great depression. 

Diversification

We don’t need to stash cash under our mattress.  However, it is a time to diversify and it has been.  I’ve been writing about diversification for some time now.  Investors got so used to (and a lot still are) keeping almost all of their savings in stocks/mutual funds.  We haven’t gone anywhere since 1998 measured by the S&P 500.  That’s a long time but it’s actually very normal after a run from 1982 to 1998 of basically going straight up.  So, going sideways for several years is normal.  We did it in the 1960s and 1970s.  You have to own real estate, stocks, bonds, private deals, cash, etc.  You would have thought the 2000-2003 bear market would have taught people to diversify.  But, there were basically two camps.  First, there was the camp that lost so much money in the early 2000s that they never came back to stocks and missed a fairly good run in 2003-2006.  Then, there were the people who lost a bunch of money in 2000-2003 and stayed in there and made some money back but still have 100% of their money in mutual funds.  We’re the group of people that have real diversification.  This is where it comes in handy.

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