The Dumb Things People Do When Worried About The Safety of Their Money

Just when I thought I've heard about all the possible silly things people do with their money when stressed about risks comes this amazing story about a southern California woman who literally almost threw away her life savings because of her fear of keeping money in a bank. (And, if you think you wouldn't do something as dumb as this financially, please keep reading).

According to a recent article in the Orange County Register, "Police went to Whole Foods where managers told them an elderly customer came in a few days earlier, hysterical after she realized she had mistakenly returned the box of crackers with her life savings inside. Frightened by the government takeover of several banks, the Lake Forest woman, whose identity was not released, had decided to take her money out of the bank and hide it in her home."

For sure, plenty of folks are worried about the safety of their money with the stock and real estate markets getting pummeled in 2008. But, folks worrying about the safety of keeping their money in the bank reflects irrational fear. If the FDIC system backing up our banking system failed to protect bank account depositors, holding onto paper money isn't going to do you any good either.

While most folks can see the silliness in keeping cash in a cracker box, consider some other dumb things people have been doing a lot more of recent months:

* Selling stocks, which dropped about 50 percent since their late 2007 peak and buying "safe" Treasury bonds which were in high demand in 2008 and offering paltry yields. Now, don't get me wrong - I understand the emotions behind this. No one enjoys feeling like they're going down with a sinking ship or part of the losing team. But selling low and buying high is the opposite of how smart investors make money. Otherwise sound investments that are beaten down in price offer value. That's why smart long-term investors were buying, not selling, stocks after they fell and you should be as well.

Barron's recent article on the topic of Treasuries excellently highlighted the historic potential overvaluation of these seemingly safe investments.

* Following supposed prognosticators who claimed to have predicted all these bad things that have recently happened. NYU professor Nouriel Roubini has been running around and pointing out all the bad things and claiming that he told you so. However, he has been highly negative for a long time. I documented this in a recent article about Roubini.

These folks remind me of all the gurus who came out after the 1987 stock market crash claiming told you so status. Shearson stock market analyst Elaine Garzarelli, was one of many gurus who supposedly predicted the stock market's '87 crash. Garzarelli's fund, Smith Barney Shearson Sector Analysis, was established just before the crash. Supposedly, Garzarelli's indicators warned her to stay out of stocks, which she did, and in so doing saved her fund from the plunge. Shearson quickly motivated its brokers to sell shares in Garzarelli's fund. Thanks to all the free publicity she got from being interviewed as a prognosticator, investors soon poured $700 million into this fund.

These investors ended up being sorry. In 1988, Garzarelli's fund was the worst-performing fund among growth stock funds. From 1988 to 1990, Garzarelli's fund underperformed the S&P 500 average by about 43 percent! So even the few investors who were in her fund before the crash in 1987 (when Garzarelli's fund outperformed the S&P 500 by about 26 percent) still lost. What she saved her investors by avoiding the crash she lost back (and then some) in the years that followed.

To my amazement, media outlets are still asking Garzarelli for her predictions and here's what she told Business Week in late 2007 for her 2008 predictions: "Garzarelli is advising investors to buy some of the most beaten-down stocks, including those of giant financial institutions such as Lehman Brothers, Bear Stearns, and Merrill Lynch. What would cause her to turn bearish? Not much. ‘Our indicators are extremely bullish.'" She also said the Dow would close 2008 at 16,000! Could she have been more wrong?!

* Reading nonsense from knuckleheads on online message boards and blogs. For example, in response to a recent news report about housing prices dropping significantly from last year, consider this online posting, "Even if there were mortgages to be had, people have learned a valuable lesson from this housing bubble. No one in their right mind is buying now unless they're looking at at least a 50% discount...from today's prices!"

If you're already stressed about challenging economic times, reading such gibberish will just make you more anxious. The reality is that there are plenty of mortgages being done these days and real estate prices aren't going to fall 50 percent from current levels. A recent index of home affordability is the best it has been since the 1970s as I discussed in a recent article.