STRATEGIES FOR MAKING MONEY
The smartest and bravest minds in finance tell us how to weather the unpredictable
By Richard Sine, Illustrations by Jason Munn,
menshealth.com
Posted Date: December 16, 2011
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IF THIS ROLLER-COASTER economy has you feeling stressed and confused, you're not alone. Mixed messages are coming from every corner. The government has been trying to encourage us to spend and borrow by keeping interest rates low. The finance industry keeps urging those of us with still-decent credit to buy houses, apply for new credit cards, and try out hot new investments. But we've been burned before. Why should we put money on the line when jobs are still insecure and markets are about as stable as the Washington Monument in a 5.8 temblor?When the financial deck seems stacked against the common guy, it's hard to know who to trust. So we turned to some of the few people who saw the financial crisis of 2008 coming. This elite cadre of traders, economists, and money managers had the courage to speak out about the building storm, earning the derision of their peers and clients—until history proved them right. We asked this crew how to survive and thrive through the next crisis. They argued the importance of saving heavily, keeping debt low, and investing in your own career—but beyond those basics, their views diverged radically and often contradicted. Some of their prescriptions are unorthodox and unproved, and just because these experts were right once doesn't mean they know what's right for you. On the other hand, whose advice are you taking now?
Don't Lose Hope
FRANK PARTNOY
CLAIM TO FAME: Called out Wall Street excess
It's only natural to believe that the future will look a lot like the past. Just as many of us had assumed that the most recent boom would last forever, we might also assume that today's bust will persist as well. Finance professor Frank Partnoy, of the University of San Diego school of law, wants to avoid that mistake. Partnoy, the author of F.I.A.S.C.O.: Blood in the Water on Wall Street, was a successful Wall Street trader who turned his back on his former colleagues to warn that their excesses would lead to catastrophe. He doesn't think Washington's reforms have done enough to rein in those excesses, but he has enough faith in America's economy to believe it can ride out the busts.
Take the long view.
Partnoy recommends a long-term strategy for retirement. Pick out about a dozen companies that sell products you know and understand, and research them. You'll still be taking risks, but at least you'll understand those risks. Buy the stocks and then forget about them. Research shows that investors tend to buy stocks when the prices are high and sell them when they're low. That's the fastest way to lose money in the market. "You need to resist the short-term temptation to buy and sell based on what's hot and what's not," Partnoy says.
Have some faith.
Unlike other advisors, Partnoy thinks stocks are a good buy for the long run. He arrived at that perspective by studying history—particularly the Great Depression, when dire predictions about the future were rampant. "Over the long run, our economy grows," Partnoy says. "People become better off, and technology improves our lives. If you come out of the blogs and news feeds and look at the arc of history, it's a story of human beings getting better over time. So stay optimistic."
FRANK PARTNOY
CLAIM TO FAME: Called out Wall Street excess
It's only natural to believe that the future will look a lot like the past. Just as many of us had assumed that the most recent boom would last forever, we might also assume that today's bust will persist as well. Finance professor Frank Partnoy, of the University of San Diego school of law, wants to avoid that mistake. Partnoy, the author of F.I.A.S.C.O.: Blood in the Water on Wall Street, was a successful Wall Street trader who turned his back on his former colleagues to warn that their excesses would lead to catastrophe. He doesn't think Washington's reforms have done enough to rein in those excesses, but he has enough faith in America's economy to believe it can ride out the busts.
Take the long view.
Partnoy recommends a long-term strategy for retirement. Pick out about a dozen companies that sell products you know and understand, and research them. You'll still be taking risks, but at least you'll understand those risks. Buy the stocks and then forget about them. Research shows that investors tend to buy stocks when the prices are high and sell them when they're low. That's the fastest way to lose money in the market. "You need to resist the short-term temptation to buy and sell based on what's hot and what's not," Partnoy says.
Have some faith.
Unlike other advisors, Partnoy thinks stocks are a good buy for the long run. He arrived at that perspective by studying history—particularly the Great Depression, when dire predictions about the future were rampant. "Over the long run, our economy grows," Partnoy says. "People become better off, and technology improves our lives. If you come out of the blogs and news feeds and look at the arc of history, it's a story of human beings getting better over time. So stay optimistic."
Be Ready for Disaster
ASSIM NICHOLAS TALEB, PH.D.
CLAIM TO FAME: Predicted Black Monday
A statistical wizard and distinguished professor of risk engineering at the Polytechnic Institute of New York University, Nassim Nicholas Taleb predicted the Black Monday stock market crash of 1987. Then came his mega-selling The Black Swan: The Impact of the Highly Improbable in 2007. Taleb says our complex financial system is vulnerable to earthshaking yet unpredictable events—his Black Swans. He argues that we can't predict anything but unpredictability. The wise man can only "invest in preparedness."
Stay out of the middle of the road.
Taleb suggests putting virtually all your nest egg in safe investments that will stay just ahead of inflation—like TIPS or CDs. Then put up to 20 percent of your savings into high-risk, high-reward investments, such as venture capital firms or start-ups in risky areas such as biotech or clean energy. The low-risk side protects most of your money from Black Swans. The high-risk side exposes you to those that might pay off.
Be ready for a storm.
Have cash in the bank—"a lot more than you think you need," Taleb says. Also maintain high deductibles on your insurance, and be wary of debt. "The more debt you have, the more precise you have to be about your future income," Taleb says.
CLAIM TO FAME: Predicted Black Monday
A statistical wizard and distinguished professor of risk engineering at the Polytechnic Institute of New York University, Nassim Nicholas Taleb predicted the Black Monday stock market crash of 1987. Then came his mega-selling The Black Swan: The Impact of the Highly Improbable in 2007. Taleb says our complex financial system is vulnerable to earthshaking yet unpredictable events—his Black Swans. He argues that we can't predict anything but unpredictability. The wise man can only "invest in preparedness."
Stay out of the middle of the road.
Taleb suggests putting virtually all your nest egg in safe investments that will stay just ahead of inflation—like TIPS or CDs. Then put up to 20 percent of your savings into high-risk, high-reward investments, such as venture capital firms or start-ups in risky areas such as biotech or clean energy. The low-risk side protects most of your money from Black Swans. The high-risk side exposes you to those that might pay off.
Be ready for a storm.
Have cash in the bank—"a lot more than you think you need," Taleb says. Also maintain high deductibles on your insurance, and be wary of debt. "The more debt you have, the more precise you have to be about your future income," Taleb says.
Stay in Crisis Mode—Permanently
ROBERT WIEDEMER
CLAIM TO FAME: Anticipated the housing crash and credit crunch
In 2006, while the U.S. economy was still a raging bull, money manager Robert Wiedemer and his brother David, an economist, predicted the housing crash, the stock crash, the credit crunch, and the recession. Today Wiedemer believes that the measly "recovery" of the past couple of years is just a bump on the way down to the dollar's collapse and high inflation caused by government debt. Wiedemer, coauthor of Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown, says the government's money policies will prop up the economy for a year or two. After that, and unlike Partnoy, he recommends getting out—not only from stocks but from bonds as well.
Go for gold.
Wiedemer likes gold and historically stable currencies like the Swiss franc, the Canadian dollar, and the Japanese yen. It's easy today for the average investor to buy all these through exchange-traded funds, or ETFs. Most financial planners consider both gold and currency to be very high-risk investments, but Wiedemer is unapologetic: "The days of comfortable investing are over," he says. "You're trying to make money in a crisis."
Be protective.
If your focus is on protecting what you have, then you might want to keep most of your money in cash and eventually move into Treasury Inflation-Protected Securities (TIPS). Wiedemer also believes we're stuck in a long-term recession that will endanger many industries. Luxury goods will suffer as the rich finally get poorer, and a slowing economy will cripple companies that make autos and other big-ticket items. So he suggests aiming your career at businesses that produce basic necessities, like medical care, food, repair and maintenance, education, and utilities.
Focus on Your Cash Flow
JANET BRIAUD
CLAIM TO FAME: Escaped the dotcom bust
Janet Briaud, president of Briaud Financial Advisors, is one of the small coterie of investment experts who had the foresight to move their clients' money out of stocks in time to avoid both the dotcom crash and the financial crisis. As Men's Health goes to press, Briaud is still out of the stock market, deeming stocks too expensive by historical standards. While most financial planners advise against "timing the market," she suggests a simple rule: Wait until prices are so low that your friends say they'd never consider buying stocks again, and then buy heavily.
Strive for balance.
If you're just starting out in your career, don't try too hard to make money in the markets, Briaud says. Instead, focus on earning more, saving heavily—as much as 20 percent of what you earn—and paying off debt. Are you carrying a credit-card balance at 16 percent? Paying it down is like getting a 16 percent risk-free return on your money. "If I could make 16 percent, I'd do it in a New York minute," Briaud says. If you have "emergency" cash reserves in your bank account but also a credit-card balance, Briaud even suggests draining the cash from your reserve account to pay it off. After all, if emergency strikes, you can still use your cards. (Just be aware that you can't pay for everything with a credit card.)
CLAIM TO FAME: Escaped the dotcom bust
Janet Briaud, president of Briaud Financial Advisors, is one of the small coterie of investment experts who had the foresight to move their clients' money out of stocks in time to avoid both the dotcom crash and the financial crisis. As Men's Health goes to press, Briaud is still out of the stock market, deeming stocks too expensive by historical standards. While most financial planners advise against "timing the market," she suggests a simple rule: Wait until prices are so low that your friends say they'd never consider buying stocks again, and then buy heavily.
Strive for balance.
If you're just starting out in your career, don't try too hard to make money in the markets, Briaud says. Instead, focus on earning more, saving heavily—as much as 20 percent of what you earn—and paying off debt. Are you carrying a credit-card balance at 16 percent? Paying it down is like getting a 16 percent risk-free return on your money. "If I could make 16 percent, I'd do it in a New York minute," Briaud says. If you have "emergency" cash reserves in your bank account but also a credit-card balance, Briaud even suggests draining the cash from your reserve account to pay it off. After all, if emergency strikes, you can still use your cards. (Just be aware that you can't pay for everything with a credit card.)
Make Yourself Valuable
RAGHURAM G. RAJAN
CLAIM TO FAME: Railed against financial inequality
In 2005, Raghuram Rajan, an economist at the University of Chicago Booth School of Business, presented a paper that predicted the exact course of the financial crisis we're dealing with now. Luminaries in the field protested angrily, but time proved him right. Then his book Fault Lines: How Hidden Fractures Still Threaten the World Economy gave an unexpected reason for the calamity long before protestors began camping out on Wall Street: He identified our key problem as the growing gap between the haves and the have-nots. The quest for the American dream initially played out in the housing market—the finance industry encouraged homeowners to take out dicey home loans—and now it's happening with education. People who are out of work or desperate for advancement are being lured into for-profit career schools by recruiters promising the moon. Students at these schools take on 45 to 80 percent more debt than students at public or nonprofit private schools. Their graduation rates are only a third as high, and they're four times more likely to default on their student loans. Your income is your most valuable asset, so your financial planning should revolve around your career and your ability to keep working no matter what happens to your investments. Here are three key imperatives in that vein:
Stay vigilant.
Keep your antenna up about which skills will be in demand 5 or 10 years down the road. "It doesn't mean you have to go to college," Rajan says. "Just look for assignments that can move you into areas where you'd have a future." Find people who seem successful and secure doing what you'd like to do, and find out how they got there. They'll be flattered you asked—and you'll have an honest answer about whether school is the best route.
Stay mobile.
The labor market is much stronger in some parts of the country than in others. Finding the best jobs might require moving around. Home prices may seem appealing these days, but beware: The economics of home ownership can lock you in place for years.
Stay humble.
Don't let pride stand in the way of your financial future. Does tech still seem geeky to you? Nursing too girlie? Well, nothing wilts manhood like chronic joblessness, and nothing revives it like being the financial rock of your family. "Nursing may not seem like a macho job, but compared with an autoworker, a nurse has many more years of well-paid employment, especially one who develops specialties," Rajan says. "The trick is to develop skills that are in demand but be able to switch if your skills become oversupplied."
CLAIM TO FAME: Railed against financial inequality
In 2005, Raghuram Rajan, an economist at the University of Chicago Booth School of Business, presented a paper that predicted the exact course of the financial crisis we're dealing with now. Luminaries in the field protested angrily, but time proved him right. Then his book Fault Lines: How Hidden Fractures Still Threaten the World Economy gave an unexpected reason for the calamity long before protestors began camping out on Wall Street: He identified our key problem as the growing gap between the haves and the have-nots. The quest for the American dream initially played out in the housing market—the finance industry encouraged homeowners to take out dicey home loans—and now it's happening with education. People who are out of work or desperate for advancement are being lured into for-profit career schools by recruiters promising the moon. Students at these schools take on 45 to 80 percent more debt than students at public or nonprofit private schools. Their graduation rates are only a third as high, and they're four times more likely to default on their student loans. Your income is your most valuable asset, so your financial planning should revolve around your career and your ability to keep working no matter what happens to your investments. Here are three key imperatives in that vein:
Stay vigilant.
Keep your antenna up about which skills will be in demand 5 or 10 years down the road. "It doesn't mean you have to go to college," Rajan says. "Just look for assignments that can move you into areas where you'd have a future." Find people who seem successful and secure doing what you'd like to do, and find out how they got there. They'll be flattered you asked—and you'll have an honest answer about whether school is the best route.
Stay mobile.
The labor market is much stronger in some parts of the country than in others. Finding the best jobs might require moving around. Home prices may seem appealing these days, but beware: The economics of home ownership can lock you in place for years.
Stay humble.
Don't let pride stand in the way of your financial future. Does tech still seem geeky to you? Nursing too girlie? Well, nothing wilts manhood like chronic joblessness, and nothing revives it like being the financial rock of your family. "Nursing may not seem like a macho job, but compared with an autoworker, a nurse has many more years of well-paid employment, especially one who develops specialties," Rajan says. "The trick is to develop skills that are in demand but be able to switch if your skills become oversupplied."
Steer Your Money Away from Big Banks
SIMON JOHNSON
CLAIM TO FAME: Spotted big-bank misdeeds
While he was chief economist at the International Monetary Fund, Simon Johnson saw the recession coming early. His book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, describes exactly how a cabal of big banks gambled with our money, wrecked the economy, and then accepted huge taxpayer bailouts, all the while paying out gigantic bonuses and fighting financial reform. Johnson, a professor of entrepreneurship at the MIT Sloan School of Management, thinks the economy will be at risk as long as the megabanks are in charge. In the meantime, he has a suggestion: Take your money out of those banks.
Go small.
Johnson advocates pulling your loot out if it's in one of the six biggest banks: Bank of America, JPMorgan Chase & Co., Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley. Smaller banks and credit unions consistently garner better customer satisfaction ratings, and they care for their customers when it counts; they've proven much more likely than the big banks to negotiate with homeowners at risk of foreclosure. Take an especially good look at credit unions: Independent research confirms that these member-owned not-for-profit organizations offer lower fees as well as consistently lower interest rates on loans.
CLAIM TO FAME: Spotted big-bank misdeeds
While he was chief economist at the International Monetary Fund, Simon Johnson saw the recession coming early. His book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, describes exactly how a cabal of big banks gambled with our money, wrecked the economy, and then accepted huge taxpayer bailouts, all the while paying out gigantic bonuses and fighting financial reform. Johnson, a professor of entrepreneurship at the MIT Sloan School of Management, thinks the economy will be at risk as long as the megabanks are in charge. In the meantime, he has a suggestion: Take your money out of those banks.
Go small.
Johnson advocates pulling your loot out if it's in one of the six biggest banks: Bank of America, JPMorgan Chase & Co., Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley. Smaller banks and credit unions consistently garner better customer satisfaction ratings, and they care for their customers when it counts; they've proven much more likely than the big banks to negotiate with homeowners at risk of foreclosure. Take an especially good look at credit unions: Independent research confirms that these member-owned not-for-profit organizations offer lower fees as well as consistently lower interest rates on loans.
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