The Bear-Proof Investor

CHAPTER 2

Cash Is King, or Is It? Short-Term Ways of Reducing Risk and Finding Balance

Under ordinary circumstances, the safest way to keep fluid wealth is in the form of cash, although this is frequently unprofitable and inconvenient.

—Merryle Stanley Rukeyser

Bill Gross remembers his first job as a bond mutual fund analyst. He was making $11,000 a year in salary and wanted to be noticed by the chief executive of his company. He got a license plate with “Bonds1” on it and kept parking his car near the CEO’s luxury sedan and even pulled up alongside the important man’s car on occasion. Someone finally stopped him at a gas station when they noticed his license plate and asked him if he would bail a relative out of jail, thinking he was a bail bondsman. At that point, Gross relates, “It occurred to me that bonds could mean something else.”

In Gross’s sphere of influence, otherwise known as the fixed-income fund management world, he doesn’t have any problem being recognized now. As a manager of more than $220 billion of fixed-income securities for Pacific Investment Management Company (PIMCO), he is probably the most successful bond fund manager on the planet (in terms of total return). His presence looms so large in the bond market that it’s estimated that he and the funds he manages represent 1 percent of all of the bond assets in the United States. In the business for thirty-two years, his flagship PIMCO Total Return Institutional Fund has an 8.35 percent five-year annualized return, ranking it in the top tier of funds rated by Morningstar, the leading mutual-fund rating service. Over a ten-year period, the fund managed to deliver about 17 percent more return than similar funds, with nearly 15 percent less risk.

Gross’s understanding of the delicate balance between risk and reward is what makes him (and his team) a manager who can outrun the worst traits of any market. Having had only one losing year in the last decade—when his fund was off a paltry 4 percent—he has one of the best long-term records of active bond-fund managers. What happened in the bad year (1994)? Alan Greenspan raised interest rates dramatically across the board to slow the economy, and the bond market was bruised badly. There’s not much you can do in that kind of environment; when interest rates go up, bond prices go down. Investors are constantly chasing total return, so when new bonds pay a higher yield than old bonds, the old bonds become less desirable to investors and their prices drop. The opposite happens when interest rates fall. Investors love the existing or older bonds because they can lock in higher returns with little risk. It’s a far cry from the days in 1967 when Gross set out to Las Vegas to make some money in blackjack and returned with $10,000 in his pocket.

Having been called the “Peter Lynch of bonds” (after the legendary manager of the Fidelity Magellan stock fund), Gross organizes his view on investing into two parts: structure and philosophy. Structure is what he calls a foundation, like the principle of a bank borrowing short-term and lending long-term. That’s how they make money. Banks take your savings deposits, for example, and lend the money to people who want mortgages. This philosophy is anchored in being consistent and successful using simple strategies day in and day out.

Like most successful investors, Gross focuses on long-term results, not quarter-by-quarter gains. Although he admits that he is often transfixed watching CNBC, he says that you need a “road map that takes human emotion out of the investment equation. Emotion is a dangerous drug to investors.”

Gross would agree that rampant emotions, or “irrational exuberance” in Greenspan’s words, propelled the bubble market to new heights that may not be sustained in the future. He shares the view of Eugene Fama, Kenneth French, and Robert Shiller that the stock market will probably not produce double-digit returns in coming years and bonds may be very close to stocks in terms of returns with lower risk.

“We’re moving into an age of diminished expectations,” Gross told an adoring crowd at the Morningstar Mutual Fund Conference in Chicago in June 2001, where all of the leading mutual fund managers were invited by the fund-rating house to share their views on investing and the future. “There will be no more ten percent to fifteen percent returns in a more subdued economy. The problem was that the capitalistic ethic thrived on globalization, and technology [spending] went to excess. Bubbles were produced in the NASDAQ market, telecommunications, and consumption. We simply overdid it and bought stocks at too-high prices. We’re in the process of deflating bubbles, that’s what capitalists do. We are now headed toward a period of adjustment and diminished results.”

Gross’s pronouncement was probably not well received, although his wisdom on the markets is noted throughout the world. Was his speech a hallmark announcing a coming age of lower returns after a bacchanal of excessive profits and market returns? If Gross is right—and he certainly can be as wrong as most economists are when predicting the economy’s future direction—then this may have been his “irrational exuberance” moment, an official signal that we’re heading into a single-digit world of total return. It is always difficult to gauge how money managers receive a message like this, although most of them discount it, knowing that world events can make the market turn in a moment. Of the thousand or so managers in attendance at Morningstar, perhaps one of the most important pow-wows of the year for professional money runners, only a handful will go back to their clients and say, “Guess what Bill Gross said: Returns are going to be down across the board.” Many of the larger fund houses (those managing more than $10 billion) will be cautious in their newsletters and issue gentle warnings that “past performance doesn’t predict future results.” They have to do that. Gross is not a voice in the wilderness, however, because he offers a solid case for why returns may be lower and the risks that accompany that prediction.

Noting an often-overlooked fact that during the last market run-up a huge amount of fiber-optic cable was installed throughout North America and 95 percent of this infrastructure is not being utilized—one indicator of a bubble economy—Gross goes on to state his case: “The economy [in the form of the Gross Domestic Product (GDP)] can’t expand at four percent to five percent a year: maybe it will grow at two percent. Corporate profit growth mimics GDP, so you can’t expect corporate profits to grow more than two percent. That means about a five percent return on stocks. Double-digit returns can no longer be with us over time.”

Are Bonds a Safer Bet in a Low-Return Environment?

Gross’s forecast really hinges on the issue of sustainability. Are double-digit returns a way of life for stocks or not, and if they’re not, what does a bear market entail? Would it be more prudent to retreat to bonds and maintain a secure, lower-risk return? Again, history suggests that double-digit returns are highly unusual in the modern era. Ibbotson Associates has tracked stocks, bonds, and inflation since the 1920s and notes that the 28.7 percent average return on large- and small-company stocks achieved in the 1990s is unprecedented and unlikely to be sustained. In only four decades since the 1920s have there been double-digit returns in stocks—the 1920s, 1950s, 1980s, and 1990s. Each decade of heady growth was followed by either a crash or two decades of mediocre single-digit growth. Here’s a breakdown:

• After the crash of 1929, the 1930s produced a −0.1 percent return in large-company stocks and double-digit growth wasn’t seen again until the 1950s, when large-company stocks had their best year, posting a 19.4 percent average return.

• After the relatively low inflation and corporate growth in the 1950s, the 1960s and 1970s were plagued by inflation and the Vietnam War and were subpar decades for the stock market, turning in 7.8 percent and 5.9 percent returns, respectively.

• Once the Vietnam War ended, gas shortages and oil embargoes went away, and inflation was tamed by an aggressive Federal Reserve, the 1980s and 1990s witnessed explosive growth with 17.5 percent and 18.2 percent returns, respectively.

If one sees a pattern developing—and this is a dangerous business when predicting the stock market—Gross may be right about a single-digit decade and his forecast may not be a jeremiad. As an investor, the twin titans of inflation and corporate profits loom large, and how those two factors play out will ultimately determine whether stocks or bonds will prevail. High inflation will boost bond yields, but you have to subtract inflation from the yield to get the real return. Inflation is the Loki of investing, almost always disguised and never seen, ready to spoil any party and deceive the most honest of savers. Stocks can prevail in times of higher inflation, but again, their returns only slightly outpace bonds.

Should inflation remain low and Gross turn out to be wrong about receding corporate profits, then his forecast of lower stock returns will be inaccurate. If history is correct, however, then the era of reduced expectations is upon us.

Cash and Bonds in a Lower-Return Environment

You will drive yourself mad trying to predict what’s going to happen to the economy, and thankfully your investing strategies don’t require a crystal ball, so don’t worry about it. Let’s look at your short-term picture first and deal with stocks later. All you need to focus on now is: (1) how long you have to invest for each of your investment goals, that is, determining your time-horizon risk; and (2) how much risk you want to take. If you are planning for retirement, you’ll be better able to meet your goals if you have more than a ten-year time horizon for investment returns. You can take more risk because your portfolio will outgrow bear markets. If your savings goals are less than five years away, then you need to have a good cash management strategy.

Cash is a fairly simple concept but misunderstood by most investors. Traditionally, cash has been seen as money in a checking or passbook account. Broadly defined, it’s money invested in easily liquidated vehicles such as money-market mutual funds, money-market deposit accounts (through banks), Treasury bills, notes, bonds, and other debt securities such as corporate notes. Cash, even currency, represents a promise. Look at a dollar bill. On the very top (above the “United States of America”) is the line “Federal Reserve Note.” The dollar bill is a promise to pay you—or whoever you give it to—a dollar’s worth of something. It’s like a little bond. In the past, you could redeem currency for gold or silver, but that policy vanished in the 1970s when the government decided to back our money with credit. So backing up that promise is the full faith and credit of the U.S. government, or in this case, the Federal Reserve Bank, which authorizes the U.S. Treasury to print the money.

Cash is liquid, meaning you can get it from an ATM or from your checking account, write a check from your money market account, or transfer money from another account where you needn’t pay a penalty or involve a broker. You can put it in your pocket, hand it to your significant other, or take it to the casino to buy chips. As an immediate promise to pay a debt, your dollar also says, “This note is legal tender for all debts, public and private.” This little phrase, on every bill the Treasury prints, means you can use it for anything. Just as cash is liquid, stocks and real estate are illiquid. You can’t just hand over the title to your home to pay off a debt (although that’s what happens if you don’t pay off a home-equity loan). You have to line up a real estate agent or broker to sell the home and redeem its cash value minus closing costs, taxes, and commission. There are similar problems with a stock certificate. You have to trade it through a market using a broker and clearinghouse to redeem its market value.

Because of its liquidity and portability, cash is best for short-term debts. Having all of your short-term needs sitting in currency is impractical and creates a storage and security problem for most people. That’s why there are a number of vehicles to store cash and give you a return in exchange for the use of your money. The following cash vehicles or “equivalents” are worth considering and are listed from safest to riskiest:

CASH AND BOND FUNDS

Vehicle Cash Equivalents		Relative Safety
NOW checking accounts		Secure with FDIC protection
U.S. Treasury bill		Full faith and credit guarantee
Money-market deposit account		FDIC insured
Money-market mutual fund		Mostly secure
Certificate of deposit		FDIC insured*
Bonds
U.S. inflation bonds (TIPS)		Secure†
U.S. Treasury note		Moderate‡
Short-term bond mutual fund		Moderate
Intermediate bond fund		Moderate
Ginnie Mae government bonds		Moderate§
Short-term corporate fund		Moderate
Intermediate-term bonds		Moderate
Municipal bonds		Moderate
Zero-coupon bonds		High volatility
Long-term corporate bonds		High risk and return
High-yield corporate bonds		Highest risk
U.S. 20-year Treasury bond		Secure if held to maturity*

*Since the longer the maturity, the more interest-rate risk you incur, bonds with a longer maturity have more risk if interest rates rise. A certificate of deposit is risk-free unless not insured by the Federal Deposit Insurance Corporation and presents some risk because it can’t be redeemed before its maturity without paying a penalty, so you may lose the opportunity to get a higher return elsewhere. † Bonds issued by the U.S. Treasury that will pay you extra interest based on the rise in inflation. ‡ Government bonds have no interest-rate risk if held to maturity. § GNMA bonds, or “Ginnie Maes,” represent mortgages that have been pooled together into notes. As such, these bonds carry a unique risk called “prepayment risk,” or the chance that homeowners will refinance at lower rates when interest rates decline. That reduces the yield (your return) on Ginnie Maes and market prices.

The Subtle Risks of Bonds

The understanding of risk is central to determining how to invest in cash equivalents and bonds. You’ll get your most secure return or principal in money-market accounts, certificates of deposit (CDs), Treasury bills, and anything insured by the FDIC. In these vehicles, your principal (what you put in) is guaranteed, along with the interest (in most cases). So if you need this money to pay bills every month or are saving for a big downpayment on something (house, car, boat, college), these vehicles will serve you well and pose no credit or default risk, the chance that they won’t pay you back your full principal. Since the FDIC and U.S. Treasury have consistently backed up their promises with the deep pockets of the American taxpayer, there’s little need to worry about losing money on T-bills or CDs that are insured.

With corporate bonds, there are several services that rate the issuer’s financial security to give you an idea of the chance of default risk. This rating system is based on letter grades, with “AAA” being the highest and “unrated” being the lowest. Bond defaults in the corporate world are relatively rare, however, unless you plunge into the world of “high yield” or “junk” bonds, which pay nearly double-digit yields in exchange for a high risk of default. Junk bonds typically carry the lowest ratings from bond-rating houses.

The most pernicious risk for bond investors is interest-rate or market risk. As I’ve noted, if interest rates rise, bond prices drop as investors scramble to lock in higher yields of newly issued bonds and dump the lower-yielding issues. Interest-rate risk is not a problem with single bonds you hold to maturity. You will normally get all of your principal back plus interest. Bond mutual funds and bonds that you sell before maturity have the greatest exposure to interest-rate risk. The general rule is the longer the maturity, the greater the risk. Before you invest, you need to ask a bond-fund manager what the average maturity or duration of the portfolio is.

If you are investing for short-term goals in a portfolio with long-term bonds (those with maturities of six years or more), you are taking a chance of losing some of your principal when interest rates rise. A useful measure of bond-fund risk is called duration, which is based on average maturity. Let’s say the duration of a bond fund is 5, which means the average maturity of the bonds within the portfolio is about five years. If interest rates rise 1 percent, then you stand the chance of losing 5 percent of your principal. The higher the duration, the greater the exposure to interest-rate risk. So if your savings goal is five years or less, stick with money-market funds, short-term bond funds, or intermediate-term bonds. Stay away from long-term bonds unless you need a high current yield now and are willing to switch to short-term funds if rates rise. You can also “ladder” your portfolio with CDs and bonds with increasing maturities (from one year to twenty years) to reduce interest-rate risk.

Bonds also carry subtle risks that are often ignored by most investors. If you lock your money into a CD or Treasury note for five years, you risk the opportunity of getting a higher return in another investment, namely another bond or stock. This opportunity risk is predicated on your willingness to sacrifice return for absolute safety of your principal. Opportunity risk also comes into play when you lock your money into a bond and interest rates rise. You lose out on the chance to be in a higher-yielding bond, which is why bond prices fall when interest rates rise.

Say you want safe and secure bonds. A natural choice would be EE U.S. Savings Bonds, which are available at 50 percent discount to face value (i.e., a $100 bond can be bought for $50) and earn interest for up to thirty years. These bonds pay 90 percent of a five-year Treasury note’s interest and compound semiannually (4.07 percent as this went to press). Unfortunately, your bonds wouldn’t reach the face value of $100 for seventeen years and the interest rate could fall behind inflation. You could do better—and have a more liquid bond—elsewhere.

To partially eliminate the opportunity risk in the short term, stay in a money-market mutual fund that is actively managed to chase the highest short-term rates, or vehicles that pay “market” rates of interest from bonds maturing in less than a year. Of course, if short-term interest rates fall—as they did throughout 2001—your money-market yields will decline as well. This income risk is unavoidable in money-market funds, which are managed to track short-term interest rates, although your principal will be safe.

MATCH YOUR TIME HORIZON TO THE RISK OF THE VEHICLE

Savings Goal		Savings Vehicle
Short-term/under 1 year		Money-market funds, T-bills, CDs
Mid-term/1–3 years		CDs, TIPS,* T-notes, short-, intermediate-term bonds
Longer-term/3–5 years		Intermediate bonds, I-bonds, Corporate bonds, GNMAs
Beyond 5 years		Balanced stock and equity income funds (see chapter 3)

*A U.S. Treasury inflation-protected bond.

How to Manage Cash for Low Risk

First, forget about yields and figure out when you’ll need the cash. Then, determine the risk you can afford to take given your time horizon. If you have a son or daughter entering college next year, for example, you can’t afford to have that money sitting in a twenty-year bond, and certainly not in the stock market. A money market fund or CD that matures when the tuition is due is probably your best choice. Keep in mind that you can buy Treasury bonds directly from the government or through a mutual fund. See here for some guidelines.

If savings yields stay low (under 5 percent), you will want to ask yourself how much more risk you can take to get a higher return. It pays to shop around for the highest money-market rates. The most competitive money-market mutual funds charge no management fees or nominal ones (under .20 percent a year; see www.imoneynet.com for pointers to these funds), so your return is higher. As in all of the other investment vehicles I’ll discuss in this book, always look for the lowest management fees you can find. That’s an easy way of boosting returns that doesn’t involve taking on more risk.

There are several variations of short-term bond funds in the mutual-fund business. The “ultra-short” bond funds are just one step ahead of money-market funds and may invest in securities that mature in two years or less. There are also inflation-adjusted bond funds that offer slightly more return (see here for more details). Such vehicles offer a portfolio of inflation-adjusted Treasury bonds or “TIPS.” When the rate of inflation—the government calls it the Consumer Price Index—rises, you get a little extra return added on.

Why You Should Own Bonds at All If, in the End, Stocks Are Better Long Term

Bonds are essential to “bear-proof” investing because they pay income and their prices (for short- and intermediate-maturity bonds) don’t move as dramatically in either direction as stock prices. Risk-averse investors prefer bonds, especially when they are spooked by incredible volatility in the stock market. For example, the lowest average standard deviation (SD) or volatility for bonds was back in the 1920s, according to Ibbotson data. Intermediate-term government bonds then had on SD of 1.7 percent; the SD for T-bills was just 0.3 percent. Contrast that to the highest average SD recorded for small-company stocks in the 1930s—78.6 percent—and you have a good idea of why investors love bonds in rough times.

As a further example, even blue-chip large-company stocks are volatile when compared to bonds. SDs for large-company stocks have never posted in the single digits, ranging from 13.1 percent in the 1970s (an awful decade for stocks overall) to 41.6 percent in the 1930s (the worst decade). In contrast, the most volatile period for bonds was in the 1980s, mostly because inflation raged in double digits the first few years of the decade, until it was finally restrained to under 5 percent at the end of the decade. That inflation resulted in SDs of 14.1 percent and 16 percent for long-term corporate and government bonds, respectively, according to Ibbotson. Bonds can be volatile, but not as much as stocks.

You must also consider the nagging reality of inflation and taxes. No matter how many ways you shake the dice, bonds might track inflation, but they won’t outpace it. Stocks can generally outperform the rate of inflation; real estate sometimes does. Inflation is the ogre under the bridge when it comes to your portfolio. It’s another form of risk that particularly ravages bond funds. If you were to take what you perceive as the safest-possible approach—100 percent money-market and short-term bond funds—you would still be incurring inflation risk because your purchasing power would be consistently eroded over time and your bonds would never outperform the rate of inflation. Once you add in taxes, you definitely lose money. The following table illustrates how inflation diminishes your investments:

THE OGRE UNDER THE BRIDGE: INFLATION OVER TIME

Over this time …		$1,000 will be worth …
5 years		$897
15 years		$722
25 years		$580
35 years		$467

Based on 2.2% annual rate of inflation, a historically low rate since inflation has averaged about 3% over the past 75 years. Source: Investment Company Institute.

TREASURY BONDS THAT MATCH INFLATION

If you just want to keep pace with inflation, the U.S. Treasury offers “inflation-protected” securities (TIPS) that make a small interest premium based on the prevailing consumer price index. While you won’t outrun inflation over time, these “full faith and credit” bonds will preserve your money in the short term. Bonds are issued at face value in denominations from $50 to $10,000 and earn a fixed rate of return plus a semiannual inflation rate up to 30 years. For more information, call the Treasury Department, which sells them directly, at (800) 943-6864 or (202) 874-4000, or visit the agency on-line at www.publicdebt.treas.gov.

How Much Should You Invest in Bonds in Rough Times?

If bonds are such a quiet harbor in times of trouble, why are long-term investors so smitten with stocks? Why not retreat to bonds every time the market becomes volatile, which is, actually, most of the time? Stocks outperform bonds simply because investors are willing to pay a premium for the additional risk and higher rewards and because stock prices are based on corporate earnings, which have generally risen faster than inflation over time. Here’s the standard comparison of returns for stock funds:

The only glaring truth from this deceptive array of numbers is that if you keep your money entirely in T-bills—or cash—you’ll definitely have the lowest possible volatility and risk, but you’ll also lose money because you have to subtract inflation (about 3 percent over the last seventy-five years) and taxes. Cash is strictly a short-term instrument to pool money and not a viable alternative to stocks in the long run.

Of course, that begs the question: How much should you have in cash and bonds? The old rule used to gauge your allocation to your age. That is, the older you got, the more you needed in cash and bonds. Since people are living to be much older than when that strategy was first hatched (octogenarians and centenarians are the fastest-growing demographic groups), the focus now is on beating inflation long term and not outliving your money. Ask yourself:

• Can you tolerate the risk of losing up to 40 percent of your nest egg after a bad year (or years) in the stock market? If not, stick with bonds and a lower percentage of stocks—less than 60 percent in stocks in your total portfolio. (More on this in chapter 3). A 100 percent stock portfolio returned about 11 percent between 1926 and 2000, with −43.1 percent being the worst one-year loss during that period. A 60 percent stocks, 40 percent bonds portfolio had a 9.4 percent return, with a worst-year loss of −26.6 percent.

• How much time do you need before you will start withdrawing money? This question isn’t solely predicated on needing money for retirement. As I mentioned earlier, you may be saving for college bills, a down payment on a second (or first) home, a boat, home remodeling, or your “third age” (retirement, or what I call “new prosperity”). If your goal is less than five years away, keep as much of the money in low-risk cash equivalents and short- to intermediate-term bonds. This is the easy part since you are saving a fixed amount of money for a definite period of time. You can’t afford to lose principal, so don’t take the risk.

• Do you want to wait out a down market? Some investors do, although they can never be quite sure when the bear market begins and ends. The classic definition of a bear market is when the stock averages are down at least 20 percent. Here’s the hitch: it depends which stocks you are watching. The NASDAQ, which is heavily weighted with smaller technology companies, was down 30 percent as 2001 came to a close. If you can’t sleep at night and are seeing your 401(k) dollars jumping over fences like sheep into the jaws of wolves, then keep some assets in cash, money-market funds, and CDs.

• How patient are you, really? The market does rebound from bear markets, it just takes time (see the table). Over time, though, as I mentioned in chapter 1, the longer you stay in the market, the lower your risk, and the lower the chance that you will miss heady gains. If you have the time to wait, your investment will recover during a stock rebound.

You probably noticed I’m only going back forty-five years and not including the 1930s. That’s because the depression is a special case. If we hit another major Dust Bowl depression, all bets are off. In the postwar era, the good news is that the longest investors have had to wait for a rebound is about three and a half years and, on average, they’ve recovered in nineteen months. If you can stomach losing from half to one-third of your capital in the short term—and then rebounding—then stocks can comprise a majority of your portfolio, provided your income needs and short-term savings goals are met.

One of the best reasons for not having all of your money in the bond market is that stock investors consistently overreact to any and all kinds of news. So events that may seem negative cause huge declines and boom times produce the outsized rally we witnessed from 1991 through 1999. Benjamin Graham, the father of value investing, often noted that “everyone knows that speculative stock movements are carried too far in both directions … thus it seems that any intelligent person, with a good head for figures, should have a veritable picnic in Wall Street, fattening off other people’s foolishness.”

Yet another scenario emerges if a recession produces deflation and interest rates continue to fall. Falling interest rates are good for every part of the economy because they reduce the cost of credit and doing business. Your mortgage rate drops and big corporations pay less for financing their debt. Businesses can increase their profit margins and stock prices go up. And bond prices rise in lockstep. In studying down markets, John Rothchild observed in The Bear Book (Wiley, 2000), “Stocks and bonds do well together. This happens when interest rates are falling and inflation is under control, a double benefit investors have enjoyed from 1982 to 1997.” This is one of the strongest arguments for a portfolio that includes stocks and bonds. In recessions, where the economy contracts—and there’s little or no inflation—a mix of 60 percent stocks and 40 percent bonds will probably beat the bear long term.

Bond Funds Worth Considering

There are a number of well-managed bond funds that deserve your attention. I’ve grouped them according to risk and return—the lower the return, the lower the risk, which is perfect for short-term goals. In addition to choosing high-quality funds to improve your investments, you can boost your return by buying “no-load” funds (no sales charge) with the lowest-possible expenses. That means not buying a bond fund through a broker or bank. Sales charges and high expenses lower your returns, which are not all that high to begin with, so avoid them.

Once you’ve met your short-term needs with the appropriate bond funds, you need to focus on longer-term goals, and that’s when the art of portfolio management becomes a real chore. What percentage of stocks to bonds do you need to achieve a decent return? What kinds of stocks and bonds do best in a down market? Can you effectively mix stocks and bonds to attain a low-risk balance that blends returns that will outlast a bad year overall for stocks?

It’s simplest to answer the last question first: yes. That’s what the next chapter is about. Before I step into that realm, I’d like to leave you with the idea that cash and bonds—no matter how Bill Gross describes the future and the state of the economy—are expressions, wishes, promises. In the words of James Buchan, who eloquently penned Frozen Desire: The Meaning of Money:

The difference between a word and a piece of money is that money has always and will always symbolize different things to different people: a banknote may describe to one person a drink in a pub, a fairground ride to another, to a third a diamond ring, an act of charity to a fourth, relief from prosecution to a fifth and, to a sixth, simply to sensations of comfort or security. For money is incarnate desire. Money takes wishes, however vague or trivial or atrocious, and broadcasts them to the world, like the Mayday of a ship in difficulties.”

Something to think about the next time you pick up a dollar bill, a savings bond, or your money-market statement. When they say people lust after money, they are telling the truth. This desire, however, can be channeled and disciplined so that we are not practicing unsafe money management.