What is “chicken money” and how can I get some?
“Chicken money” is a term I coined years ago. It’s money you cannot afford to lose. It’s money that belongs in short term CDs, the bank, or money market accounts. It’s your money market mutual funds, or treasury bills bought directly from the Federal Reserve. The money these investments have in common is you don’t get rich, but you don’t get poor. You don’t earn a lot of interest in those investments a lot of the time; you’re not concerned about the return on your investment, but the return of your “chicken money.”
How much “chicken money” do I need?
How much “chicken money” you need depends on you, not only your circumstances and your age and the level of investments you have, but your own personal risk tolerance. “Chicken money” is what lets you sleep at night. So trust your instincts. If you think you can deal fine with just having six months of money put aside for an emergency fund, that’s great. If you’re closer to retirement, perhaps you think, “Gee, half my savings should be in chicken money, so I’ll never be poor.” Or, for a woman, “I’ll never be a bag lady.”
What are bonds?
Beware of bonds because you can lose as much money in bonds as you can lose in stocks. Think of it this way: you buy a $1000 bond right now, triple-A rated, the interest rate is maybe 5 percent, and you’re going to hold that bond for 20 years to maturity and it will keep paying the interest. But if we have a general increase in inflation, and now interest rates rise, and another triple-A company next year sells bonds and pays 9 percent interest because that’s what rates are, then you’re stuck with that old low-interest rate five percent bond. And because nobody wants that bond if you go to sell it, your $1000 bond might be worth only $600. When interest rates go up, bond prices fall. Nobody wants your old 5 percent bond if inflation has pushed up rates, on even good bonds, to 7, 8 or 9 percent. So you don’t want to lock all your money up in long-term bonds because you would be devastated by inflation.
What about a security I buy from the federal government?
Suppose you buy a triple-A rated bond or a U.S. government bond, let’s say a 10-year Treasury. Do you really want to lock your money up at today’s rates for 10 years when there’s a possibility that around the world they’ll look at America and say, “Gee, you’re printing an awful lot of dollars. We think that’s inflation. We’re not going to lend you money anymore at 2.5 or 3 percent. In fact, we, the rest of the world, will demand perhaps 6 percent to lend you money for 10 years.” Then, as interest rates go up, the value of your old 2.5 or 3 percent bond goes down.
Can’t I sell that bond back to the federal government for what I paid for it?
No, that’s the trick. If you have a short-term treasury, say, three months, six months, even a year, you’re not going to lose any money. You’re going to hold them to maturity. But if you buy something with a 10-year maturity or longer, and interest rates rise because of inflation fears, you’re stuck with that old low-yielding bond when new investors can get a much higher rate.
Can I buy some kind of a mutual fund that’s invested in Treasury bills?
There are two issues when it comes to buying bonds. The first is quality: Junk bonds versus triple A-rated or government bonds. You want to stick with high quality. The second is maturity. How long are you tying your money up for? If you’re thinking about Treasury bonds, 10 or 20 year bonds, there is even a risk there, not that the Treasury will default, but that interest rates will rise in the meantime.
Why don’t I just put my money into gold and be done with it?
The world has been collecting dollars, money we’ve sent overseas to buy all kinds of stuff. They’re holding dollars. They mostly invest it in Treasury bills (IOUs), notes, and bonds. They’re getting a very low rate of interest and they’re watching us print more dollars. They’re looking at the dollars they’re been collecting and wondering, “Do we want these dollars?”
Well, until now, they’ve been content to sit on dollars. America’s still the strongest country in the world. But one day, they are going to say, “We don’t want those dollars.” And America will be stuck. You’ll see that happening as the price of gold starts rising. It already has risen a lot. That’s because gold is the one thing in the world that retains its value. Since time immemorial — it’s indestructible, you can’t create it, and it’s been the medium of exchange that’s lasted for centuries. That is why gold is a hedge, so to speak, against the dollar and there are many ways you can buy gold.
Should I buy gold stocks?
There are several ways you can hedge your dollar bet in gold. First, there are stocks and mutual funds, good mutual funds, that buy the shares of companies that mine gold. As the price of gold goes up, their costs really don’t go up so more is profit. And those companies usually pay dividends. So gold stocks are one way to hedge your bet.
Second, there is something called a unit investment trust, which is a stock based on the price of gold. It is called GLD; that is the symbol and it is a gold unit investment trust. It goes up and down in conjunction with the price of gold. Another thing a lot of people do is buy gold bullion coins. These are coins that aren’t very rare because they’re currently being made, and they contain an ounce of gold. You put those, by the way, in your safe deposit box for safekeeping. You’ll pay the price of gold plus a little bit of a premium for the handling and the creating of the coins. There has been a scarcity of gold coins, so that premium has gone up to 6 percent to 8 percent over the gold price these days.
Is there a gold store where I can go to buy these coins?
A warning! A warning! A warning! You can buy gold coins and you can buy gold bullion bars, but do not leave those coins or bars at a dealer. Deal only with a reputable dealer from the American Numismatic Association and make sure you take delivery of your coins and then make sure you store them safely in a safe deposit box at the bank.
Don’t go overboard with this idea of gold; it is just a way to hedge another one of those risks that maybe one day the dollar won’t be worth as much as it is today.
Should I really hedge my retirement bets by having some of these alternative investments?
I think this is a moment where you need to rethink everything you thought was true in the past. The fact is, you need to rethink how you balance all your assets. Your home is an asset, and it still has some value. Your stock market investments may have less value, but over the long run they have always beaten inflation and provided growth that has historically averaged more than 10 percent with dividends reinvested, so you need stocks. You need “chicken money.” Then you perhaps need a little bit of hedge against the possibility that the government will be printing so many dollars for all the good reasons they have. You’d like something that is perhaps even a little better than the dollar and that might be gold, gold stocks, or gold coins, safely put away.
Should I buy an annuity?
As you sort out your investments, real estate, stock market, your “chicken money,” and your hedge against inflation, perhaps gold or precious metals or maybe commodities, you have another issue. Not how much to invest and how to invest, but how much can you withdraw to make sure your money lasts as long as you do.
Now, we could turn all of our money over to an insurance company today and based on current interest rates, they could promise you a check a month for life. They’d set it up right now. You never can take more money out, but you would get that check every month as long as you live. That is called an immediate annuity. As long as you are dealing with a strong insurance company, there’s no problem. But the question is whether that $4,000 a month that looks great today will be worth something 20 years from now; will it pay for anything? So you don’t want to tie all your money up into an immediate annuity and lose control. The insurance companies have figured that out and they have created some wonderful new annuity products where you get the benefits of stock market growth, which has traditionally beaten inflation, that builds your account, and also contains a point when you reach a high-water mark where you can annuitize based on that highest price of value of your investments. These are decisions that you need to make with your financial counselor.
- This is an edited transcript of an interview conducted February 3, 2009.