Mattresses are no savings vehicle

It was around midnight, and I was looking forward to some quiet time as I settled into a John Grisham novel.

It was around midnight, and I was looking forward to some quiet time as I settled into a John Grisham novel. I had barely turned a page when the phone rang. It was my buddy Joe, who spends a great deal of time on the road for work.

This affords him lots of time to think and — since he knows I sleep only a few hours a night — to call me in the wee hours. (His wife wisely prefers to sleep and refuses to take his early-morning calls.)

Joe was returning from a late dinner meeting with clients where the conversation centered on the continuing collapse of the economy and the scary stock market.

The subject apparently left everyone at the table apprehensive, especially him.

“The volatility of the stock market is making me crazy nervous. I am a wreck and can’t take it anymore,” Joe yelled into the phone.

“How many Dunkin’ Donuts black coffees have you had?” I asked.

“Just three large, but that’s not why I am all hopped up,” Joe shot back at me.

He said he no longer had faith in the market.

“I am taking out all my money, and I’ll keep it in cash,” he said.

Before I could utter a word, Joe said, “And don’t worry. I plan to diversify — I’ll stash half the money in my mattress and bury the other half in my backyard.”

I tried to be understanding and offered that there are some real benefits to holding cash. For example, when your equity investments make you feel like you’re strapped to a roller coaster, holding cash provides a nice, smooth ride. Even if there’s no chance for big gains, completely avoiding big losses can be psychologically calming. During these very crazy times, that level of comfort is nothing to knock. And there’s nothing as reassuring as checking your bank account and discovering that it contains the same amount as when you last checked — plus a little more.

At the same time, as I explained to Joe, cash isn’t perfect. While holding cash may make you feel good over the short term, it’s not the best move over the long haul.

“The long haul?” Joe screamed. “At this rate, I’ll have no money left to invest for the long haul. There are no safe investments. Zero. Zip. And I am sick and tired of all this investing nonsense.”

I calmly told Joe that when you invest in equities and the market goes down, you may feel like you’ve lost money, but you really haven’t.

Then I closed my eyes and braced for his response when I finished the thought: “Those are only paper losses,” I explained.

“You are right, my friend; the paper we all lost is called cash money,” Joe said, not looking at the matter as philosophically as I.

“Joe, you know as well as I do that if you sell all of your financial holdings and move to cash, you lock in your losses,” I said. “They go from paper losses to actual losses, and there is no way to recover from that mess.”

Joe asked if I had any other pearls of wisdom to share.

Yes, I said, there was one. By maintaining his current positions, even with the market as depressed as it is, Joe was taking advantage of the only way possible for his portfolio to have a chance of benefitting when the market rebounds. And I assured him that it would rebound.

“Jim, I have to ask you the same question I asked my financial adviser, ‘Do you truly believe that BS?’” Joe asked.

“I do,” I said. “It’s going to be a long, bumpy ride, but I’m still betting on long-term investing.”

I wished Joe a good night, told him to stop drinking coffee and finally started reading my book.

Jim Pavia is the editor of InvestmentNews.