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If you had a couple of million dollars, what would you do with it? While many people desire to be rich, very few people ever get there and the lucky few who win the lottery end up being bankrupt within five years. Why?

Managing a great deal of money isn’t as easy as it sounds. Let’s look at a few scenarios:

You decide to play it safe, you take two million dollars and buy bank CDs at your favorite bank earning a cool 6%. You figure 2 million earning 6%/year will give you $120k of income without every touching the principle.

The flaw: Banks only insure funds up to 100k so if the bank fails, you could lose 1.9 million dollars. If you don’t think this scenario applies, take a look at the people who recently lost millions here in Netbank’s failure recently.

You decide to avoid the bank FDIC pitfall by buying a $1,000,000 home and keeping the rest of the money in bank (100k) and the rest (900k) in bonds and mutual funds. You have insurance on your home so if it gets destroyed, the insurance company will reimburse you right?

The flaw: Although insurance is pretty reliable, there are many EXCLUSIONS in which an insurance couldn’t or won’t pay. A few quick examples: Insurance won’t pay if your home is destroyed by insurgency, riots, nuclear fallout, or flooding to name a few. The scenario exists that a huge disaster could render an insurance company insolvent and get no claims paid at all. Additionally, your home is only worth what the market is willing to pay for it so if you paid 1 million, it doesn’t mean it will always be worth 1 million. There are plenty of homes in Florida right now that were worth 300k a year ago that are now worth 250k and may be worth 175k by the end of next year.

You decide to live in a modest home (250k), invest the rest of the money in the stock market because even though the stock market goes down, it’ll go up in the long run right?

The flaw: Historically, the market has returned 10% per year, but historically we’ve never had 1/3 of the US population retiring at nearly at the same time. Historically, we’ve never faced random terrorist attacks that send shock waves throughout the economy. Historically, we’ve never faced a labor force of 1 billion Chinese or 1 billion Indians competing for the same jobs, the same resources (food, oil, metals, coffee, etc), and the same lifestyle.  It’s no odd coincidence that Warren Buffet is in China this week looking for investment prospects and perhaps some better opportunities. While stocks generally do return 10%, you need to be sure you’re invested in the RIGHT stocks.

You decide that the best place for your 2 million sans 100k (at the bank) is Treasury Bonds. The US Government has never defaulted on debt so you’re perfectly safe.

The flaw: China and Japan now hold about 2 trillion dollars of US debt. IF they ever decide that they don’t want to subsidize the American lifestyle, they can send the US Treasury market into a panic by dumping Treasuries. It’s an unlikely scenario but still plausible but worse yet is the devaluation of the US Dollar.  If you like eating New Zealand lamb, Chilean Black Grapes, or drinking French wines, you’ll pay through the nose for these “luxuries” with the continued devaluation of the US Dollar. The devaluation of the USD along with inflation will ravage your Treasury savings.

So where is a “safe” place for your money? There really isn’t a “safe” place for money because “safety” and “money” don’t exist anywhere in our financial world.

“Money” is nothing more than a unit of exchange for one thing: labor. At the end of the day, every product and every service that a person wants can be reduced down to the labor involved in producing or servicing something.

So ultimately, the best place for money is in an investment that gives you the best access to the widest variety of labor in a society. I’ll let you figure this out for yourself ;).