Alternative Adversities

Talking Real Money - Investing Talk

Don McDonald

Business, Education, Investing, How To

4.2 • 680 Ratings

🗓️ 22 May 2025

⏱️ 29 minutes

🔗️ Recording | iTunes | RSS

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Summary

Don shares a deeply personal tale from 2007 when, as an HOA treasurer, he dodged a financial landmine involving auction-rate securities—just before the 2008 crisis froze their liquidity. That real-life scare flows into a fierce takedown of today’s institutional obsession with illiquid assets like private equity, especially in university endowments. Harvard’s high-risk strategies, retirement plans promoting alternatives, and the seductive myths of market outperformance get picked apart. Don and Tom warn investors not to chase complexity or “exclusive” returns, especially when liquidity disappears. Plus: a pension tax trap, Opportunity Zone hype, and the nerdy joys of CD ladders. 0:04 Don’s HOA horror story: auction-rate securities before the 2008 collapse 2:06 Liquidity vanishes when you need it most—Wall Street Journal echoes the warning 3:51 Harvard’s endowment crash: elite returns turn embarrassing 4:34 Private equity’s scary recipe: micro-cap risk + debt + 3–4% fees 5:44 Why these complex products often spark crises 6:42 “Works until it doesn’t”: the fatal flaw of illiquid alternatives 8:10 Illiquidity explained with the real estate analogy 10:13 State pension investing: lessons from Washington’s shift to index funds 11:32 Why elite endowment managers must pretend to be smarter than markets 12:10 Microsoft vs. Mac: the cost of complexity, again 13:15 Secret formulas, snake oil, and the myth of exclusive financial wisdom 14:36 Listener Q1: Can Alaska pension income go into a Roth? 16:25 Listener Q2: Qualified Opportunity Zones—worth it or tax dodge trap? 19:05 Tax deferral vs. sound investing: when kicking the can isn’t smart 20:27 Listener Q3: Fidelity’s CD ladder tool and emergency funds 21:40 How CD ladders smooth yields—and a shortcut with bond funds 23:27 Volatility = reward: why risk is the reason stocks outperform 24:10 Why indexed annuities kill returns—and the fake comfort they sell 25:30 Tech support rants, Gen Z lifelines, and the “is it plugged in?” curse Learn more about your ad choices. Visit megaphone.fm/adchoices

Transcript

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0:23.3	like you sign up for your one dollar a month trial at shopify dot com slash setup
0:28.6	reality radio for a really great future.
0:38.0	We're talking real money.
0:40.6	Travel with me back in time.
0:43.9	To the year 2007, Don McDonald is elected as treasurer of his homeowners association
0:52.2	and ever concerned about the quality of the investment portfolio of everyone,
0:58.2	including our HOA, I called our financial advisor for the HOA in Phoenix.
1:06.7	Worked for, who did he work for?
1:09.2	I'm trying to remember. I think it was was a g edwards at the time or something
1:11.7	i said where's our money he said oh ho your assets are invested in incredibly safe auction rate notes
1:20.5	higher yield but daily liquidity and i said now tell me more well it turned out turned out, he said, well, these are, you know, like 10 year
1:29.6	average maturity bonds from municipalities and riskier entities. But, but because you can get
1:38.9	there's a daily auction, you can always get out no matter what, you will be able to get out.
1:47.7	Well, in early 2000, I actually, I told him, I said, get us out of that.
1:51.8	Let's just go into money market mutual funds because this is our cash we need for stuff.
1:55.9	I can't have it in long-term securities. He kept saying, no, don't worry, don't worry, don't
1:59.1	worry. They've got liquidity. They got liquid. Well, anyway, in 2008, if you'll recall, the financial crisis was, it's getting started.
2:06.4	Big banks that have been buying up the securities at these auctions every day just stopped buying.
2:15.4	They didn't want any more risky stuff in their portfolio. And just like that,
2:21.1	investors, not us, who thought they had a cash equivalent with a higher yield, were stuck with
2:26.1	long-term bonds that they could not unload. They were not liquid anymore. Their money was locked up. Nobody wanted it for years. Liquidity,
	...

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