Where Do Millionaires Invest Their Cash to Keep It Safe?

I’ve been having a conversion about investing and money with the reader “Frat Man” in the comments section of another post.  He asked:

I also had one other question I have always wondered. Where do millionaires keep their money? In the sense that FDIC insurance only covers $250,000 at the bank and SIPC only covers $500,000 at the brokerage. I mean, I can’t see Bill Gates putting $250,000 at thousands of banks across the country, nor can I imagine Lou Simpson’s net worth getting wiped down to half a million because of a bankrupt Scottrade. Ha! So when people accumulate millions, what becomes the “safe spot” to keep it?

When I went to hit “reply” in the comments section, I realized that it was nearly 1,500 words so I thought it might be better to just post it as its own in the event some of you were interested in where billionaires and millionaires like Bill Gates or Lou Simpson invest their cash.  It really has nothing to do with beginners, otherwise I could have gotten an Investing for Beginners article out of it, but it might still interest those of you who are curious about these sorts of things.

 

Here is my answer …

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Where Do Millionaires Park Their Cash?

First, you have to realize that “money” in one sense doesn’t exist. It is an idea. If you are talking about the green pieces of paper the Treasury department prints, there is only about $575 billion in circulation yet household assets in the United States are valued at more than $50 trillion.

Think about that. If you owned every single United States dollar bill in the entire world, you would only have 1/100th of the estimated household net worth in the United States. The reason: Those greenbacks are merely an exchange mechanism. They represent something that people can trade to signify a claim check on society. In and of themselves they have no value. We could have just as easily chosen sea shells or jars of strawberry jam. The reason societies have preferred gold and silver over time is they are difficult to mine, so it is very hard for governments, politicians, kings and presidents to make the currency worthless by printing more paper.

The result is that most wealth isn’t held in the form of cash.  In fact, I think of money as being held in seven distinct forms (there are more but these are the major ones):

  1. Business ownership (stocks).  If you own a chain of dry cleaners that makes $1 million a year in profit, you could probably sell the company for between $10 million and $15 million.  You don’t have that money “sitting” anywhere, but it is yours nonetheless.
  2. Money they have loaned and must be repaid to them in the future such as bonds, certificates of deposit, money parked in bank accounts, and money invested in money market funds,
  3. Real estate, such as hotels, apartments, stadiums, homes, storage units, bridges, etc.
  4. Commodities such as gold, silver, platinum, corn, cattle, mineral rights, oil, natural gas, sugar, coffee, etc.
  5. Nominal currencies, such as United States dollars, Euros, Yen, and British Pound Sterling stuffed in envelopes or briefcases.
  6. Intellectual property, such as ownership rights to famous songs, books, movies, and photographs. If you owned the rights to Star Wars, you could have no money in the bank but the truth is, you are probably a billionaire because you could sell those rights to a lot of interested investors; they, in turn, could create new merchandise and products and make money from it, which is why they are willing to pay you. Brand names are a huge source of intellectual property value, such as Coca-Cola, Clorox, Wrigley, Hershey’s, and Folgers.
  7. Tangible property, such as famous paintings, historical artifacts, rare books, etc. If you owned an original, signed copy of the Declaration of Independence, you could convert it into any other form of wealth you wanted, such as nominal currency, which you could then use to transfer your wealth into real estate, or commodities, or any of the other categories.

That means that most of the time, someone with substantial net worth doesn’t need to park their money in a checking account. You couldn’t steal Bill Gates’ $50+ billion from him because it isn’t money in a briefcase; it is office buildings, shares of stock, railroads, book copyrights, personal real estate, private jets, rare art … the list is endless.

Don’t Think of “Money” As Being Cash

Gold bars

You can actually quote assets in any exchange mechanism you prefer. One of the best techniques professional investors use is to measure the Dow Jones Industrial Average in gold because it gives you a better idea over long periods of time of the real inflation-adjusted purchasing power of the market. You may think of your house as costing, say, $500,000 but you could just as easily say your house is 6,850 barrels of oil ($500,000 divided by $73 per barrel). You have to start thinking about value and learn to adjust for the fact that United States dollar, as any other measure, is nothing more than a proxy.

This may help explain the perspective of an investor…

It is estimated that there are 1,348,528,420,000 barrels of oil in the ground that have a 90% or greater probability of being drilled and recovered by humans (called “proven reserves”). The current spot price of crude oil is roughly $73. That means that all of the oil in the ground is worth an estimated $98,442,574,660,000. Let’s round up and call it $100 trillion.

(For now, let’s ignore the obvious fact that if this oil was harvested at once, oil would be worth about 50 cents a barrel because the supply would grossly exceed the demand. At current consumption rates, that is enough oil to meet world demand for 54 years. )

That means if you were to suddenly inherit 100,000 barrels of oil, you would be worth $7,300,000 at today’s market prices (100,000 barrels x $73 per barrel = $7.3 million).

If oil rose to $100 per barrel, your assets would rise to $10,000,000. You are now worth an extra $2.7 million! Where did it come from and where is it parked? Nowhere. It is the estimated liquidation value of your oil if you choose to sell right now and the market has enough demand to fill your order without the price falling. You are quoting the value in dollars because, as a United States citizen, those dollars mean something to you. You inherently understand the value of $5 and what it will buy you compared to $20.

If the United States government began to print money so it became worthless, and a loaf of bread that originally cost $5 is now $10,000, your oil may be trading at $146,000 per barrel even though you have gained nothing in purchasing power, giving you an asset value of $14.6 billion. The thing is, your purchasing power would be the same because:

  • $14,600,000,000 would buy 1,460,000 loaves of bread if each loaf was $10,000 just like
  • $7,300,000 would buy 1,460,000 loaves of bread if each loaf was $5

That means that, measured in bread as an exchange, the government printing money didn’t have an influence on your actual purchasing power. You can still buy the same loaves of bread as you could before hyper-inflation. This is one of the reasons famous investor Warren Buffett talks about the importance of measuring gains in your net worth in “how many cheeseburgers you can buy”.  Purchasing power counts.  Not dollars.

What Do The Rich Do With Their Cash?

If you are specifically interested in what the rich do with their short-term cash, comparable to the middle class putting money in a checking or savings account, there are several popular alternatives to those with at least a few million dollars:

  • Establishing a so-called zero-balance account. The rich investor has his or her money in bonds, certificates of deposit, commercial paper and other highly liquid debt instruments. They write checks out of the account, which has $0 in it, and at the end of the business day, the private bank sells off enough of the highly stable, liquid investments to wipe out the negative balance in the account, bringing it back to $0. That way, if the bank fails, it doesn’t hurt the investor because the underlying assets are held in his or her name, not the name of the institution. (This service is known as custody or, in some cases, global custody. The banks will charge a small fee for it as a percentage of assets in most cases.) Almost every intelligent rich person on the planet uses some form of global custody because you don’t want to worry about losing your shirt because a broker failed.
  • Parking the money directly with the United States Treasury in an account backed by the taxing power of the United States government. They can buy short-term Treasury bills and keep rolling them over until they need the money. Unless the United States goes bankrupt by hyper-inflating, they are safe.  Buffett literally has tens of billions of dollars of Berkshire Hathaway’s money parked in Treasury bills, bonds and notes at times.  There is no risk of default or bankruptcy unless the entire nation goes bust!
  • Physically holding cash in multiple currencies in safe deposit boxes throughout the world. These aren’t insured, though, so there is that risk.

I hope that helps you understand how a lot of private banks such as Northern Trust think about parking money for millionaires and other rich investors.

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  • chapmang

    Hey Joshua,

    I just want to commend you on this blog as it is one of the best blogs I have read thus far, but I do have one question. I haven’t once seen you mention Carlos Slim. I have read articles about him and interviews of his and he seems to me to be a financial genius. What are your thoughts on Slim and his investment ideas and practices? What are your thoughts on Slim as an individual as well? I’m not an investor but I am just interested in understanding money so that it is not an issue for me like it is for so many others. This blog and your about.com articles have revolutionized my understanding of money and wealth so I just wanted to thank you!

    GSC

    • Chapmang, I’m glad you find them useful and appreciate your kind words.

      There is no doubt that Carlos Slim is a very intelligent man and he understands money. I would probably agree with your assessment that he is a financial genius and what he is built is very admirable. I think there is a lot about entrepreneurship and intelligent risk-taking people can learn from him. He is a living example of how someone can take a single asset and use it to fund intelligent investments in a wide range of industries, letting compounding do the heavy lifting over decades.

      My thoughts on Carlos Slim as an individual? Honestly, I don’t know enough about him to have an opinion because I judge people not just on their acumen in business but how they act both in public and private. Do they treat people with respect? Do they have integrity and keep their word, even in small things? Are they compassionate and understanding? You can still be ruthless in business and possess all of these traits. I have volumes of books about dozens, if not hundreds of people in my library but there just isn’t a lot written about Slim since he arrived on the world stage only a few years ago. I’d certainly like to learn more, though, because anytime someone builds something of value like he has – not just the money but accomplishes something – it fills me with incredible joy. I love watching people build things, whether they are creating empires or sculpting art.

      I will say, though, that Carlos Slim recently bought one of my favorite properties in the world, the Duke Semans mansion, so the man has taste! I adore that building.

      On a side note, I do think that he faces a challenge in how the public perceives him in the United States because he has an effective 90% monopoly on the telecommunications industry in Mexico, where per capita income is only $14,000 or $15,000 annually. You have to realize, though, that Americans eschew monopolies and have since the trust busting days of President Teddy Roosevelt; remember how much Bill Gates was disliked during the height of Microsoft simply due to the size of his market share? Even if they love your product, this is something that is woven into the cultural fabric of the country. People adore Buffett because he is perceived as having built Berkshire Hathaway from the same town in the middle of cornfields by being honest and investing wisely. If Buffett had acquired 90% control of the insurance industry, I’m not sure many Americans would like him. It’s woven into the DNA, left over from the muckraking days of anti-Standard Oil sentiment. (Personally, I adored Standard Oil. But that’s just me.)

      • Eliyahu_ben_Yehoshua7

        You are so intelligent and your articles are on point. I am guessing that you may not be so enthused about the Rothschild family dynasty. They in my opinion are the smartest business family to walk earth, just my opinion.

  • Great article 

  • MmmCashews

    This was totally fascinating and I’ve been wondering this for years. Thanks.

  • Fb1958

    Thank you, this is the first time that I got it about money, I read so many articles about that subject and never understood like this time, Thanks, one question if I may Joshua, how do currencies are valued? like Euro $1= 1.25 E, or I dinar Kuwaiti worth $ 3.50, how is that determent, Iraq used to have 1 Iraqi Dinar= $3 now $1=1120 Iraqi dinar, can you please explain that if possible? thanks again

  • Yvette

    Good info b/c I was curious myself. When I start my business I want to invest safely and wisely!!

  • Jjeffrey1

    Joshua…i like the many others want to give you a solid “Pat-On-The-Back” for your very thorough, sincere and down to earth explanation of this subject.
    i have always wondered about where the wealthy “Stashed” their cash and now, after reading your wonderfully thought out comments…i too Finally Get It.
    Congratulations Joshua…..Keep Up the Great Work. I also respect and appreciate your comments to chapmang about Carlos Slim when you say “Honestly, I don’t know enough about him to have an opinion because I
    judge people not just on their acumen in business but how they act both
    in public and private. Do they treat people with respect? Do they have
    integrity and keep their word, even in small things? Are they
    compassionate and understanding? You can still be ruthless in business
    and possess all of these traits.” There is not enough being said out there about the character traits of Honesty, Treating each other with Respect, Integrity, and Keeping our word esp when it comes to Money. Again, Joshua…A Great Effort.
    Well Done.

    • Joshua Kennon

      Welcome to the site =)

  • Albert Ackerley

    Mr Kennon,Thanks for the well explained information on money matters and I believe that we cannot hold cash as liquid but invest in bigger projects which bring big returns.I have been investing in Mining projects and prospects in Europe but looking forward to move to Africa to tap the new potential in Minerals like gold mines in Congo and Oil in Eastern Africa.What would you have to say about Joint ventures,Is it a good way to Invest money wit some people in Africa?

  • Very well written, thank you.

  • Hyderabadi

    I am reading this from south central India. First time in 30 years, I am understanding clearly about money ! Thank you Kennon. Your article on the joy of cash dividends is eye opening as well. Surely this is missing from the school system’s education here.

  • fascinating and well written…thanks

  • Thanks for this article.

  • Andrew

    Excellent. So when I thought I was “investing” my money in Gold, I was really transferring purchasing power in dollars to a commodity that has sometimes acted like a currency, while speculating on higher valuations via inflation of the US dollar. It appears those expectations were already priced in, and when it looked like the Fed would begin tapering my speculative play dropped in value. I learned an expensive, but hopefully good lesson and will focus on investing from now on!

  • Jeff Wagner

    Excellent, easy-to-read article. It also explains why raising the wages of ordinary workers and upping the minimum wage actually helps the economy more than giving tax breaks to the wealthy. The former spend all they earn, therefore creating demand for goods, services, and ultimately, jobs. That’s why I can’t understand why the wealthy, who really do buy politicians, are against raising wages as that will eventually make them even richer. Or, are they thinking only short-term?

    • Bobby

      I know this is 2 years old, but still…

      If you double the minimum wage, sure, the workers should make double the amount of income (pre-tax, at least). But not as many workers do. See, if we double the labor expenses of the company, we gotta cut the fat somewhere. How? Layoffs – all of a sudden half the workforce is gone. Now, thousands of people are making double, and thousands have nothing. Alternatively, we increase the prices enough that we still profit. And other companies will increase their prices, and so on, until everyone has pretty much the same purchasing power as before – which is a) bad because inflation goes up and b) ineffectual at what you’re hoping to achieve by increasing minimum wage.

  • Jeff Wagner

    All the available oil on earth: “At current consumption rates, that is enough oil to meet world demand for 54 years. ) And after 54 years, then what? Are we prepared to be without it? Where’s the investment in alternative energies? I sure hope somebody is thinking about that because my great-grandchildren are going to be in big trouble if they aren’t.

  • Toccarra

    Thank you this was a great article. So many people believe that money in a bank makes the seem well to do. However your article has satisfied a burning question of my own as to how to properly place cash in a prospective where it can be used rolled over and balanced to no risk to you.

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  • Stephen Kepple

    Money is strange stuff. Although it can exist in many forms, each with its own risk level, there is no true security, anywhere, for money. That’s the funny thing you learn when you get hold of a fair amount of it. I believe it has a lot become harder to make money with money, unless you are very rich.

  • flankton

    You didn’t answer the question. If you win 500,000,000 what do you do? At some
    Point you have to deposit the check for 500,000,000 right? I don’t imagine if I win the lottery I’m going to suddenly start believing in “investing”. Maybe a little bit. But I want my money liquid in my bank account where it’s safe

    • The question I answered isn’t the question you thought was being asked. You’re asking something entirely different than the original poster. Therefore, it would require a different answer.

      Keeping $500,000,000 in a bank account indefinitely, perhaps for the remainder of one’s lifetime, is insanely and irresponsibly risky. In effect, our theoretical owner would be using 100% of his or her net worth to provide a non-secured loan to the bank, which is itself a highly leveraged financial institution. If the bank fails, which happens from time to time, they would be all but wiped out entirely, almost all $500,000,000 gone in an instant. That kind of risk would keep me up at night. In fact, it should keep anyone who understands how a bank is structured up a night. This sort of disconnect is one of the reasons non-rich people who win the lottery lose everything in a matter of years. Few seriously rich people would even dream of behaving in such a potentially destructive, if not outright catastrophic, way. Who wants to be one credit crisis away from disaster? It’s economic malpractice to even consider it. It should induce cold sweats.

      For someone in such a situation, who demanded rough nominal purchasing power stability (even if it meant drastically higher inflation risk, which is what you are describing) the most reasonable way to achieve this would be to build what amount to a privately-structured money market fund. It would consist of a directly-held collection of U.S. Treasury bills, bonds, and notes, as well as other investment grade fixed-income securities including tax-free municipal bonds, corporate bonds, agency securities, brokered FDIC-insured certificates of deposit, etc. These holdings would need to be directly registered and serviced by the trust department of a bank, not deposited in the bank’s broker-dealer division (an important distinction!), and overseen by a qualified asset management company. With such a large scale, and such a simple mandate, this could be achieved for an impressively low expense ratio. A portion of the interest income each period would be deposited into a demand account, such as a checking account, for the owner to spend or donate as he or she saw fit. In effect, the asset management company would be acting in a lot of ways like the treasurer of a mid-sized corporate enterprise.

      It should go without saying given the broad, academic, general terms in which we are discussing this thought experiment, but for the sake of clarity I’ll mention it, anyway: none of this constitutes investment advice.

      • sheen

        still didn’t answer flankton’s question – if you win the jackpot and receive a check for $500 mil, what is the very next thing you do? do you walk down to your bank and make them exceedingly happy? what do you do with that check until you plan out all the other strategies you mentioned? it still has to be cashed, right? so, how does one go about that?

        • That’s because the question, as presented, isn’t the right one. It’s like asking, “When baking an apple pie, at what stage do I melt the silver and begin forming the chess pieces?”. In other words, I’m not answering it because nobody with any sense would behave that way. To answer the question risks dignifying it.

          You wouldn’t claim the $500,000,000 check and need a place to put it unless you (not “you”, but the royal “you” as in whomever we are discussing as our theoretical lottery winner in this academic exercise) were completely and totally ignorant about how to deal with large amounts of money. Which, to be fair, describes most lottery winners, I suppose. They didn’t get rich through being self-made so an influx of capital to them would be as foreign as moving across the world in a lot of ways. They don’t even know what they don’t know. Again, hence the reason they lose it and destroy their lives in a vast majority of cases.

          The winner would have to be prepared before claiming the prize. This is just a back-of-the-envelope, 30-second response (literally over a cup of coffee) so I’m going to oversimplify some things but logistically the process might look something like this:

          Most likely, they would need a tri-party team consisting of 1.) high net worth estate planning attorneys, 2.) high net worth tax partners at a major accounting firm, and 3.) the managing directors of an asset management company, all of whom could communicate and collaborate in an open-architecture environment. Together, that group, with all of its expertise, could hide the winner, build defensive structures to keep the capital safe and hidden (so as few people as possible knew where the money was), and then deploy the cash the moment it became available. Depending upon the state in which a person lived (the ability to remain anonymous and/or the mechanism for achieving anonymity differ by the location of residence and/or where the ticket was purchased, particularly in cases where a person might work and travel over a state line, such as in the Kansas City, Missouri / Kansas City, Kansas area), this could involve – and this is just one potential mechanism among a sea of potential mechanisms – a revocable trust with a generic-sounding name owning a newly established family limited investment partnership, most likely structured as a limited liability company and organized by the aforementioned attorneys. The prize could be claimed through this end entity, at least two steps removed with no public record of the winners themselves. The prize could be claimed by a representative of the LLC, most likely a group of attorneys named as officers of the LLC, showing up to claim the funds. All of this would be ready to go – a turnkey operation – in the weeks that followed the owner of the winning ticket identifying it, taking photographs of himself or herself with it, and storing the ticket itself in a safe deposit box.

          The end entity (the family LLC owned by the generically-named revocable family trust) would have a temporary corporate account established with a well-capitalized major bank, such as a subsidiary of BNY Mellon or JPMorgan Chase. The funds would be sent from the lottery to this temporary holding account and immediately used to purchase short-term Treasury bills from the United States Treasury with the trade settling against the account as securities were delivered. In this case, the securities would be delivered to the aforementioned bank trust department, which would service the assets. That way, if the bank failed, the entity could seize the Treasury bills as it would remain segregated property and never on the books of the bank trust department in the first place as they had always been directly registered in the LLC’s name. Instructions would be given to rollover the Treasury maturities as they arise, most likely building a ladder ranging from a few days to six months, so the amount of capital in the temporary cash holding account at the bank could be minimized. Now, you’ve bought yourself time to actually get to the task of building the directly-held money market account.

          The actual implementation would be much more detailed and, again, differ by state and unique circumstances surrounding the winner but that’s a sort of broad-overview of one way to get it done. Nobody with any sense would go down to a local bank and deposit the money. Forget even the credit risk of the unsecured loan, which, again, is what it amounts to over the FDIC limits, but think about the physical security risk. Ideally, the winner shouldn’t want anyone in his or her hometown knowing that he or she won. Bank employees are going to notice a massive amount of capital sitting in a single account. Hiding it, through obscurity, in a firm custodying trillions of dollars, and operating from a major financial center such as New York, is the way to sidestep that issue. (Again, this is assuming the person is an economically-ordinary individual. If you’re worth $5 billion, live in Chicago, bank at Northern Trust, and own a bunch of operating companies, you’d want your private banker to know there was another influx of money coming, this time from a low-probability non-earned event. You still wouldn’t dump it in a checking or savings account but that’s because the bank would have in-house capabilities to accommodate your already-complex risk exposures.)

          Doing it this way, or some way similar, also solves a lot of other issues that wealthy people are often aware exist but less affluent individuals don’t even consider. For example, any owned real estate or vehicles need to have the title transferred as quickly as prudently possible to some sort of legal intermediary. If it’s a family home, it might even be worth it to have it be owned by an LLC, extract all of the equity by making a private, secured 1st mortgage loan on the property itself underwritten by you, personally, so you can seize it in the event it goes bankrupt, and then cover it with an overly abundant insurance policy. When people figure out who won a lottery, they do stupid things. Like find your house and try to break their leg in your driveway. All kinds of defenses and castles need to be put in place very, very quickly; things rich people would already have spun-up, in whole or part, which a typical American wouldn’t have even started.

        • sheen

          wow, you’re the most snarky, critical and arrogant snob in responding to questions…there’s no such thing as a wrong question, just the one YOU don’t really know the answer to…you think you’re going to win followers that way? i’m sure you’ll only respond with more snarkiness, so don’t bother…i’d rather find someone who actually knows the answer AND how to treat people respectfully…may you find repentance

        • I’m genuinely baffled by this response because I had a lot of fun writing the post – I love discussing topics like this and it’s more than just what I do for a living, it’s my passion. Snark, or criticism, wasn’t even remotely on my mind. This is one of the drawbacks of text-based communication. If we had been speaking face to face, or I had posted a video response so you could see my inflection as my thought process played out and I was typing in real-time, I think there is a near 100% probability this miscommunication wouldn’t have occurred because you could have seen how much I was enjoying the exercise. To be completely honest, and candid, I’m a bit taken back by the aggressiveness of your post. I truly meant no offense.

        • Donna Bayley Lovett

          I understand Sheen’s response, because basically your answer was telling him he’s an idiot for asking what to do with a $500,000,000 cheque, especially “if you are holding a $500,000,000 check wondering what to do with it, you’ve already failed. You’re going to have a bad time, and ” Nobody with any sense would go down to a local bank and deposit the money.” How can you fail by winning money and not knowing what to do with it? How else can you access a cheque without making a deposit? So, your answer does come off as rude, but I know from all your other writings that it was not your intention. I’m surprised that you didn’t just answer him and say, “I would take it to the bank, and then invest, buy property, buy artwork,, etc. etc.” and give him the easy answer. If I personally won the lottery, I would take it to the bank to deposit it, but then your answer implies that I don’t have any sense. That is baffling to me. Our banks in Canada are different than in the US, so I probably would be okay to deposit it, without any fear of it disappearing, but now I want to know why you don’t think it’s okay to deposit it!! I am a complete newbie to investing, and I’m sure there are others that read your posts that are not financial pros. I hope that helps.

        • Moises Benitez

          I don’t understand how can you feel he was snarky. The first time he gave a background on how the wealthy think about money, and quite honestly how everyone should see money. Throughout his responses, while they were high level he answered the question in multiple instances…

          Bottom line don’t hold money in cash, but invest it in protected S corps or LLCs where they give you a return. I suggest independently reading books on financial literacy…it changes your mindset completely.

        • Donna Bayley Lovett

          It was presumptuous of me to answer on behalf of someone else, so I’ve deleted my post. Moises, we all have different interpretations and reactions to what we read, and what we hear, and what we think was said. Bottom line, I felt I understood why Sheen reacted the way he did, but only he can answer. I am reading (devouring) financial books, articles, and trying to learn as much as I can. Thanks for the suggestion.

      • flankton

        So what you are saying is an old fashioned safe and some firepower is the only way to really protect your money without purchasing bonds and things. I think it’s criminal a banks assets are not backed up by the govt up to infinity. They force you to buy their garbagy bonds. This is why we can’t Give up second amendment right here

        • A safe + firepower would be even riskier for two reasons:

          1. What is in the safe?
          2. How can you hope to compete with military-grade technology employed by a highly trained terrorist force hellbent on taking your assets? Particularly in light of the on-going expense necessary to maintain your defenses without offsetting productive assets?

          If the safe consists of physical currency (cash), then it is, in fact, far riskier than U.S. Treasury bonds. Bond represent the backing of the United States Government, along with all of its military might and taxing power. However, cash is what amounts to a bearer instrument that can be stolen or destroyed. Namely, he who holds it owns it absent compelling evidence to the contrary. It is also almost impossible to use in any meaningful amount due to post-September 11th anti-terrorism and money laundering controls. Many businesses are simply not equipped to handle cash in a meaningful sense – try buying a house for cash, for example. Good luck at closing. People are going to want an instrument, such as a cashier’s check. Furthermore, cash doesn’t have an easily accessible audit trail so administering the wealth would be a nightmare. Treasury bills, bonds, and notes, on the other hands, have most of the benefits of cash, only they can be directly registered. This means that the government has legally bound itself to return a specific amount of nominal currency in the future, on specific dates. You can’t “lose” the Treasury bond like you can cash. They can’t be stolen from you as easily given all of the safeguards around them.

          Put more bluntly, from an economic perspective, an unlimited guarantee by the United States Government on bank deposits would not be better than owning the Treasury bills, bonds, and notes outright. If anything, such a policy would be irresponsible for citizens as it would allow bank shareholders and executives to take on far more risk than might be prudent, knowing that the taxpayer is always going to bail out the depositors. That’s a terrible incentive to unleash on both Main Street and Wall Street. The Treasury bill, bond, and note is safer. When someone like Warren Buffett has almost $100 billion sitting around, it’s not an accident that most of it is sitting in Treasury bills, bonds, and notes. It’s not physical currency. It’s not all parked in some checking account. The same goes for Apple and all of these other corporate giants. You’d only keep a checking account necessary for reasonable disbursement amounts to facilitate expenditures as required.

          If the asset in the safe consists of something like gold, you’d end up losing significant purchasing power merely storing and securing it. Furthermore, in the event of a global disaster, the government has in the past, and will most likely in the future, use its vastly superior military capabilities to seize the gold from you whereas property rights on things such as real estate and equities have generally – not always, but generally – been protected by the rule of law provided the U.S. was not conquered and occupied.

          The way to get around political risk, such as that of the United States collapsing, would be to hold similar assets around the world through a network of legal entities and structures. You could have apartment buildings in Germany, bank deposits in Switzerland, hotels and stocks in Japan, etc.

          Money is purchasing power. That’s what it is. Once you move beyond a small-time economic worker who can delude himself or herself into thinking their small savings can be bailed out, there is no way in life to guarantee purchasing power. That’s the nature of meaningful wealth. It comes down to who controls the military and the laws, and how you’ve positioned your assets within that framework, both in terms of legal system and geography.

          In other words, if the U.S. Treasury bills, bonds, and notes collapse, your cash isn’t worth anything and your gold is going to be seized, most likely, by the strongest military on the planet. You need to think about risk differently. Again, this is all academic and abstract. We’re talking in high-level, theoretical terms about what the nature of risk is and how a person might properly protect his or her resources.

        • flankton

          That’s trippy man. I think it’s a scam. If I have $100 bill and go to grocery store, I’m good for at least a week. So it stands to reason if I have a safe full of $100 bills I would be good for a whole bunch of weeks. I only need roughly 90 years worth of grocery money in the safe though. The rest I guess can be invested. The whole
          Thing seems fishy to me

        • Steve Roberts

          Venezuela
          Zimbabwe

        • flankton

          People’s argument is USA is going to collapse like Venezuela? Lol. If that happens we got bigger problems and the bonds aren’t worth anything and neither are the stocks. But I’ll have a beach community that remembers me giving them $100 bills for services and groceries for fifty years.