It’s been nearly 9 months since the $ started to show signs of meltdown fever. Except the meltdown was the rush to buy $ as a hedge against collapsing markets and disappearing credit lines.

In the last few months we have seen markets bottom and even recover some poise, aided and abetted by the action of nearly last resort, quantitative easing. There was nothing left in the toolbox really.

So far so good in some respects. The S+P has rallied 37% off its lows…….mind you its lows were 57% down from the highs and the index still stands 42% off the highs of the last few years. Not that the numbers really matter. The main news is that markets are functioning…still.

And the $ balloon has finally burst with QE signaling a chance to sell the $ without worrying what the equity markets were doing. The Kiwi$ has rallied 32% from its March low even outpacing the hammered Pound, up 21% from its low of $1.35.

Markets can do very strange things. Even whilst the $ was rallying to extreme highs against all currencies, no one really wanted to own it. Now people really really don’t want to own it.

This is all very well but this type of volatility is impossible to manage. How can any investment manager talk about average returns of 10% a year when markets are moving at this rate. How can any business hedge currency risk when currencies are moving like this.

The bigger problem for the US is trying to stop the snowball effect that may happen if markets really decide to dump the $. The noises coming from China may be regarded as monetary brinksmanship but with Russia, looking very wolflike these days, nibbling in behind, it’s becoming a more serious issue.

There’s a lot of politics involved in this but the positioning is clear: the US is weak not just economically but militarily. The exhausting foray into Iraq has stretched the US war machine as well as seriously impacting on its reputation. Historically the ability to create coin or currency was usually backed up by military power. One of the first actions by invading nations was to replace the local currency with its own.

This makes currency both a political and economic issue. So whilst there is unlikely to be any immediate change in the $ role as global reserve currency, there is no doubt that the dance of change is underway.

The short term problem for China is its huge ownership of US bonds and other paper. So they wouldn’t be happy with a complete collapse right now but it seems like less money will be staying in $ and more will be finding a new home whilst they work out how a new global currency system might operate.

But with GM falling apart and US unemployment rising to severe levels, concerns over the health of the $ will only continue to mount.

People are always asking me where to put their money so I thought I would do a simple post about it. I should add this is simply my own opinion and you should really check with a financial advisor…………tongue firmly in cheek!

Let’s start with the obvious. There is no such thing as a risk free investment. Even sovereign bonds (those issued by governments) can turn into wallpaper….look at the US Treasury market now, the world’s safest place to park your cash. Ultimately it’s just an IOU, generally backed by commodities or in the case of the US by a fairly large military and lots of nuclear rockets.

Having got that out of the way the first question you need to ask yourself is why am I investing? Is it for regular income or the hope of generating a huge pile of cash for future income generation (retirement for example).

Let’s start with the income piece by looking at what is available:

- Cash deposits.

- Term deposits.

- Government bonds.

- Corporate bonds.

- Shares that pay dividends.

- Property.

Generally, as in all things, you pay for what you get. The main issue any investor should consider before making an investment is liquidity:

How quickly can I get my cash and what will I have to pay to get it?

As many investors found to their cost in recent years, liquidity is the single most important issue.

Which draws the question: is there a market for my investment?

In the case of cash that is not a problem (actually that’s not true but for the sake of this exercise we will pretend that cash is always available - see Northern Rock for further details).

Stocks can generally be sold on the spot and cash received quickly (of course stocks can be suspended at anytime which means you can’t trade it, well not on the exchange).

Bonds have a market you can trade on but liquidity can be an issue sometimes.

Property you can forget. That’s a highly illiquid asset.

Managed funds as we see all to often can be very hard to get out of and the fees can be severe. If the fund holds any kind of assets other than plain stocks then redemptions may force suspension of the fund (we’ve seen that).

Baring all that in mind cash seems like the best place to have your money if access is an issue and you are risk averse. Second up would be quoted shares with high liquidity (shares on the major index e.g. Telecom in NZ which pays a good dividend). Bonds would be next and then managed funds and property bringing up the rear.

Anything that offers these with a twist is to be avoided unless you’re a professional. Like guaranteed capital return plus 100% of the 5 year blah blah return on some index. Avoid. There are huge fees and margins built into what is a simple option structure.

I’m sorry but there’s no free lunch in the investment world. But it’s very easy to lose money or receive poor returns whilst paying out large fees and charges.

My advice is start with cash and spend some time learning about basic stocks and bonds. Believe me it is not difficult.

Armed with a little knowledge most people could construct a portfolio of cash, stocks and bonds in a few hours.

Also don’t be lulled into the idea that you are a long term investor and won’t be pulling down the cash for 20-30 years. Look at how fast the world is changing…….planning that far ahead may not actually make much sense.

As with most things in life, keeping it simple can pay off. Also spending a little time learning about investment can save you a lot of money as well as enabling yourself to take charge of your own financial destiny.

These days I get asked by a lot of people where they should invest their money. It’s a good question given uncertain times. Not only are we experiencing a traditional recession but there are concerns about the actual financial system itself.

This in turn has led to a somewhat deeper examination of money itself: its construction, process and ultimately its value.

Personally I’ve been in cash for the last 18 months having sold out of commercial property investments. Now, as interest rates are cut heavily and our banking system is on its knees, cash doesn’t seem as appealing as an investment class.

What if rates continue to fall? What if new rules are introduced such as limits on withdrawals, foreign transfers, currency trading etc? What if interest is frozen, bonds converted to equity and so on.

Gold is often mentioned as something useful to hold. I’m not a big fan of it myself but it’s likely to be worth something at some point so does have some holding appeal.

What I’m most interested in at the moment is investing locally. This could mean sticking in a decent veggie patch (if you have the space, which fortunately in NZ we do). How about investing in renewable energy for the home, solar heating, a wind turbine, battery pack etc? Normally its a bit upfront payment but at least you know you’ll be getting a decent return in KwH rather than cash.

But also investing in local food systems, local infrastructure or local transport. These all appeal because they can provide a return, real or cash,  and they keep cash circulating locally, which keeps people employed and boosts confidence in the community.

It’s an opportunity for local councils to get involved as they are struggling to riase cash at the moment given the rush into government guaranteed bank deposits. Many people talk about sending money overseas as they are worried about the falling NZ$ or whatever your local currency is. I say be careful. If you can’t access your cash in person then you have a much higher risk profile. Foreign cash deposits can be the first items to be frozen when new rules are applied. If you are worried about currency risk you can always do a forward currency trade with your bank or hedge through an online fx company.

There are some useful websites about this including, of course, Financial Permaculture as well as Catherine Austin Fitts at Solari. If readers have any useful links or ideas on this please let me know.