My image of summer is that it’s a season for taking it easy. Everything — including me — should move at a slower pace compared with the rest of the year. The reality of my summers is that they’re busy and hectic like all the other months.
The continuous time crunch is partly me, of course. A lack of time is also the modern condition. “What is true is that we are awash in things, in information, in news, in the old rubble and shiny new toys of our complex civilization, and — strange, perhaps — stuff means speed,” writes James Gleick in the book, “Faster: The Acceleration of Just About Everything.” “The wave patterns of all these facts and choices flow and crash about us at a heightened frequency. We live in the buzz.” The “buzz” doesn’t take the summer off.
Time is a scarce commodity. Time pressure has critical implications for managing money. You have only so much time to cope with financial issues after doing your job, preparing meals, raising kids, nurturing relationships, volunteering in your community, keeping up with technology, voting in elections and having fun. One reason why I favor relatively simple investments is that fees are low. Like investment returns, fees compound, and the lower the fees the less returns are nicked. Another reason for focusing on plain vanilla investments is that they’re time friendly. They’re easy to grasp and monitor. Keeping finances simple frees up more time to do things you probably value much more.
Let’s say you’re worried about the risks of another plunge in the stock market. The S&P 500 sports a 25 percent return over the past 12 months and you believe investors have lost sight of the fundamentals. You could buy insurance against the “tail risk” of a dramatic plunge in stocks by buying options on the CBOE Volatility index. You could also buy shares in a mutual fund that offers a hedge against financial catastrophe. Problem is, these protection strategies are usually costly, complex and time-consuming if you want to understand what you’re buying. (Buying into a financial product you don’t grasp is a recipe for trouble.)
Easy hedging — cash
An easy way to create a hedge against economic and financial trouble without taking up much time is to increase how much of your portfolio is in cash, say, a federally insured savings account or U.S. Treasury bills. (On Wall Street “cash” refers to high-quality short-term investments like T-bills.) Cash is “perhaps the oldest, easiest, and most underrated source of tail-risk protection,” writes James Montier of GMO, a Boston-based money manager, in his white paper “A Value Investor’s Perspective on Tail Risk Protection: An Ode to the Joy of Cash.” Cash is a timesaving solution, too.
When it comes to savings, we all try to figure out the best “pot” for the money. Risk and return are key for deciding where is the best place for our money. For instance, we don’t put our emergency savings into the stock market. Equities are too risky, too volatile for that purpose. Instead, our emergency savings go into a low-risk, low-return investment like a savings account. I would factor in the scarcity of time into the traditional risk-and-reward equation. Of course, you’ll still be pressed for time. Hopefully you’ll spend more of your days on things that matter more to you. In the meantime, enjoy the rest of the summer.
Chris Farrell is economics editor for “Marketplace Money.” His e-mail is firstname.lastname@example.org.