What Should You Invest in If You are Afraid to Invest in Stocks?

Beyond Buy-and-Hold #37

Lots of people are becoming skeptical of claims that stocks are always the best asset class. These people are open to my message to the extent that they view it as an anti-stock message. But they often lose interest when it comes time to settle on an asset class other than stocks in which to invest their retirement money.

Say that you agree that stock prices are going to crash again over the next few years. What are you going to do about it? The super-safe asset classes (TIPS, IBonds, CDs) are paying very low returns today. You?re not going to be able to finance a comfortable middle-class retirement investing in asset classes paying returns of 1 or 2 percent real. Like it or not, you?re stuck with stocks!

No.

You are not stuck with stocks.

Say that you determine that the best return you can get by investing in one of the super-safe asset classes is 2 percent real. And say that you need a long-term return of 6 percent real to be able to accumulate enough assets to retire at age 65. Do you need to rule out the super-safe asset classes as inadequate for your needs?

By no means.

If you were planning to invest only in the super-safe asset class, you would be right to conclude that going that route is not going to permit you to finance a solid middle-class retirement. But this is not how Valuation-Informed Indexing works. I am not anti-stock. I am pro-stock. The purpose of Valuation-Informed Indexing is to help you increase the amount you have invested in stocks.

You obviously don?t want to invest heavily in stocks while prices are in the process of crashing. But please don?t make the mistake of coming to the conclusion that the moral of the story is to stay away from stocks. Nothing could be farther from the truth.

A stock market crash to the rescue???

Say that it takes three years for the next crash to take place and that that crash will bring stock prices down 65 percent from where they are today, down to the P/E10 level of 8 that has applied at the bottom of every major bear market we have seen in U.S. history. Do you know what the most likely 10-year annualized return is for an index fund purchase when the P/E10 value is 8? 15 percent real.

I am not saying that you will likely get a 15 percent return on your money one time. I am saying that you will likely get an average return of 15 percent every year for 10 years running. Your retirement account is going to grow by big bunches in a short amount of time. You want to be there for that number.

You won?t be there if you keep most of your money in stocks at today?s prices. If you experience the 65 percent crash in a personal way, you are likely going to swear off stocks forever. That?s what happened to most of those who followed Buy-and-Hold strategies in earlier bear markets. You want to protect your money in some super-safe asset class paying 2 percent real until stocks again offer a decent long-term return and then move the money into stocks.

The true purpose of super-safe assets: a port in a storm

If you earn 2 percent real for three years and then 15 percent real for seven years, is your 10-year return 2 percent real? It is not. It is not quite 15 percent real. But it is a number a good bit closer to 15 percent real than it is to 2 percent real.

The point of moving your money today to a super-safe asset class is not to earn the 2 percent real return that that asset class will pay you. The point is to preserve the money so that you can invest it in stocks when stocks are again paying the sorts of returns you need to obtain to finance your retirement.

Buy-and-Holders look only at current-day realities. No asset class is offering a good return today, so Buy-and-Holders conclude that this is a bad time for investors. This is a wonderful time for investors! To see why, you need to take into consideration the returns that valuation-informed investors will be obtaining after the next crash. Your aim today should be to position yourself to take advantage to the greatest extent possible of the opportunities that will be presented by that crash.

Rob Bennett is always trying to figure out what is different about budgets that work. Rob?s bio is here.