The investment universe seems to be as confusing now as it?s been at any time in recent memory. While it seems that opportunities exist?they always do?the risks have never been greater. So what are the choices, and how do we play them?
The Stock Market
The stock market is hovering around Dow 11,000?is it a good place to be? Many of the experts are saying that the economic recovery is just getting started, and now is an excellent time to be in the market. Profits are growing and the market is following a textbook post recession path to higher levels, maybe higher than we?ve ever seen in the past.
But voices in the woods?including regular OOYR contributor Rob Bennett?are advocating caution. Valuations remain high by historic standards and the economic backdrop is much more convoluted than it has been in past recoveries.
I?m not an investment expert by any means, but I lean toward the cautious camp here. The problem I have with the experts predicting a higher market is that most of the same people are always predicting a higher market. In fact, it?s hard to find a time when they?ll tell us to sell and get out. I?m always wary of that kind of advice?are they really experts, or are they salesmen for Wall Street? Perhaps they?re a little of both.
The other issue I see is that the market has risen from the 6000s in the Spring of 2009, up to nearly 12,000 a few weeks ago. That?s a near doubling and represents a substantial climb already, even if the market is headed higher. Advances of that magnitude scream out for a conservative approach. Markets tend to go down much faster than they go up, leaving little reaction time when the dominos start to fall.
What are your thoughts on the stock market?
Investing in real estate looks certifiably high risk right now; prices have fallen somewhere between 20% and 50% in most markets?considerably more in some, and there?s no way to tell when or even if that direction will change in the foreseeable future. Meanwhile the foreclosure mess continues with no end in sight and financing is harder to get than it has been in a human lifetime. The situation looks quite hopeless, doesn?t it?
I?m not entirely sure. Again, I?m not an investment expert, and I?m not sounding the call for everyone who can buy up investment type real estate, but there are a few positives that can?t be overlooked either. Bear markets are the best time to buy any investment. Prices are going at a discount and mom-and-pop money has been scared out of the game. There are more deals than ever and in many markets rents are more expensive than house payments, quite possibly setting the stage for an eventual turn around.
I?m not suggesting that real estate will do a ?V? shaped recovery in which prices suddenly spike higher; but I am pointing out that the dynamics of the market are taking a definite turn. It will take a big bankroll and a lot of patience, but real estate may be a better buy now than it seemed to be at the peak of the market when people were pouring money in with little thought.
What do you make of real estate as an investment in this market?
Bonds, Certificates of Deposit, Money Markets
In the current ultra low rate environment, traditional fixed income/fixed value/cash type investments seem to be almost a suckers bet. A long term portfolio, such as a retirement account, would be a guaranteed loser if that?s where you have most of your money invested.
The choice now is between short term instruments at rates that don?t even cover inflation, or taking a chance and tying up money long term at historically low rates. At this point, unless you expect rates to head into negative territory?which is not a common event?committing funds at these rates long term doesn?t seem as if it will bring a happy ending.
But it?s equally true that cash investments have become more about safety than return. In the past they?ve offered safety AND return, but not now. Their primary purpose in a portfolio mix right now is avoiding loss, and I don?t know if you can rightfully call that an investment at all. It might best be considered as money out of circulation?even so, it?s a must-have in an investment environment as muddy as the one we find ourselves in right now.
What do you think about cash type instruments as investments at these rates?
<23>Commodities (OK, energy more specifically) and Precious Metals
I?ve done some reading up on Peak Oil, and while no one knows for certain whether or not we?ve actually hit the point of permanently diminishing production, one factor does seem painfully apparent: the cheap oil–the stuff we?ve been banking on at least since World War II?is thinning out.
How else can we explain why Alberta tar sands, Brazilian heavy oil and suspected-but-not-yet-in-production Artic Sea oil seem to be our best hopes for the future? I don?t know a thing about investing in commodities, but I think the facts support a permanent investment position in traditional energy stocks, and at least a small position in any halfway promising renewable energy companies.
This might be especially true now since energy prices are quiet at the moment. Is an energy price spike in the offing? We can?t know for certain, but it?s not something we should bet against either.
Precious metals rate a discussion all there own. I?m going to take the liberty of lumping silver and platinum in with gold, since gold seems to be the dominant metal?and also because I don?t know enough about each to discuss the subject intelligently.
I?ve read the different arguments for and against gold as an investment, but there are some interesting developments taking place. For one thing, the price of gold has been moving up in a fairly methodical pattern which has to make us think that there?s something more here than another speculative bubble.
And here?s another key point?over at Bucksome Boomer, in Kay?s post about gold as an investment, my buddy Money Reasons made a brilliant point that millions of people in India?a country where people buy a lot of gold?are moving into the middle class where they?ll able to afford more.
I think this point is fundamental to any discussion about gold as an investment. Most of the gold discussions I?ve read or heard center on consumption and investment in the US and in Europe. But India and other countries that favor gold are the economies that are growing the fastest and will have the greater impact on future price swings. For that reason alone, the long term trend favors investment here. Maybe it even explains the almost methodical increase in gold over the past decade.
For more direction on precious metals, check out Global Assets Strategist.
What do you think about commodities as investments?specifically energy and precious metals?
Investing in yourself
What if on analysis you decide there’s nowhere truly promising to invest your money? When all else is in doubt, investing in yourself is unquestionably the most secure way to ?invest?. When we think of investing, we think about allocating money between various passive vehicles that will provide an income stream while we?re out doing other things.
While this is important and necessary, the reality is that very few people will invest their way to prosperity. What?s the alternative? Your career or business!
We might have some difficulty wrapping our minds around the concept of our career or business as an investment, but just like any other aspect of life, it can always be improved by putting some money into it. And when we invest in our careers or businesses, we?re really investing in ourselves.
If you?re in a job situation, think of ways to invest in improving your skills, either for your present job, or in preparation for a future direction. This could mean taking courses, formal or otherwise, to learn new skills, such as computer software programs common in your field, a foreign language to become bi-lingual, or a given avenue of your employers business that isn?t very well understood. With globalization and advancing technology, it shouldn?t be too hard to identify some niches.
There are many competent people in every field, but precious few experts?think in terms of investing to become one. It?ll give you a leg up on your coworkers by default.
If you work for yourself, you?re probably already familiar with investing in your own business. There are always new products, new market niches and parallel opportunities and more often than not, entering them requires capital. Think of it as investing in your business, or more specifically, in yourself.
Where are you investing your money right now? Do you see areas of opportunity? Do you think some investments are looking too pricey at the moment? Are you avoiding investing altogether? If so, are you investing in yourself?
I hope the stock market keeps going up (I was wishing for a year end rally). But it’s appreciated enough that I’m content with the gains we’ve made!
If I were a richer man, I would invest in real estate, but I have to settle for REITs instead. I also have mutual funds that are invested in most of what you describe above.
Ironically I’m not in a Gold mutual fund (or ETF), but I should re-evaluate based on what I my Indian buddy said… It’s just that the prices are so high!
Thank for the mention! 🙂
MR – I’m guessing that a complete diversification, with a little bit of each may be the only way. There are so many confusing and convincing crosswinds that it all seems like a crapshoot.
Regarding gold being so high–I agree–but it makes me wonder why we don’t ever hear more about silver, the “poor man’s gold”. It moves in lock step with gold, but trades at less than $30 an ounce. I need to look into this myself…
Your last paragraph is the best advice – invest in yourself: learning, your business or just saving money. These have always been and always will be the keys to wealth. Everything else is just a sales pitch.
Rob Bennett agrees with John Hussman, myself and others – at these valuations, long term prospects for the market are in the sub-5% range. Being in equities also exposes you to a tremendous amount of risk – more than you’ve been led to believe by the media.
There is nothing wrong with real estate being “on sale” and down 30-50% … except the economic pressures are still there and will cause prices to continue downward (as much as 20% more to the downside). Lot’s of excesses from 1998 on will take more price deflation to neutralize to normal.
Bonds are at the end of a 30-year bull market. When rates go up, bond prices will go down. Some issues will do better than others. Don’t buy any bond unless you are comfortable with that yield and can hold it to expiration.
CD’s and Money Markets are paying next to nothing – that’s better than losing money but not suggested to lock up for a long time.
Commodities are a really wild ride but can be a useful hedge against other market activity.
Our clients are close to 100% in cash and using that cash to back up the sale of Out of the Money Put Options. There are other alternative strategies like this that will lower risk and still generate reasonable returns. You should work with a professional on this, however.
John – I think you’re right on the money about the modest return/tremendous risk situation in the stock market. That’s one of Rob Bennett’s points, that the time for the stock market is coming, but not at these levels.
It seems that every investment class is subject to the same economic pressures, and part of the problem there is that they’re still playing out and don’t seem to be very well understood. Until we reach some sort of economic equalibrium, cash may be the best place to be despite meager returns. If nothing else, if you can keep what you have while every one else is losing, you become richer if only in a relative way.
Kevin, I was giggling when I saw this article because I posted a comment on it on another site (lol). And here I was wondering where my comment was 🙂
Anyway, really quickly, as I did a long comment for the other site – I agree, you have to IMPROVE yourself if you are going to continue to be able to support yourself. Whether there is a recession or not, it is ALWAYS wise to LEARN new things. The challenge is to make it fun.
Excellent post as usual – way to go!
I was just contemplating a post similar to this with the new benefits enrollment period upon on. (ESPP, 401k, etc)
We are focusing on 401k, with a pretty even balance of stocks and bonds. We also invest in an employee stock purchase plan. We have our 529 plans, and that is controlled by the plan in terms of where to invest depending on the age of the child and the risk level that implies.
I am too afraid of gold or silver right now. I am focusing mostly on dividend stocks with the extra 18 cents I have at the end of the month these days.
Hi Kevin, I’m sorry I took a while to comment. Thanks again for the link!
You really covered the pros and cons of the investing landscape. I was surprised to find how much I agreed with John, as usually I do the opposite of the standard CFP advice.
My husband and I are investing in ourselves, from improving our Spanish skills to forming a new business to take advantage of mispricing. I am in a few select commodity stocks, but this is a small percentage of my money. For many reasons I think US real estate is risky, and I’ve been renting since 2006 because of that. Bonds scare me, especially municipal bonds where I expect defaults in the future.
I am most bullish on the precious metals, which I believe have a long way to go on the upside. I believe in buying bullion, not ETFs which may or may not hold the metal they claim (read the prospectuses for details). A closed end fund like CEF which holds metal and trades like a stock is not a bad idea either. I have some cash for emergencies but I think bullion is better, since the US dollar is losing value steadily.
BTW, I’m not a financial advisor so this is just IMO. 🙂
Jennifer, congrats to your husband in regards to your business. Do you have a website? Would love to her about this “mispricing” idea.
Did you know Spanish before?
How are you learning? At home or through a classroom setting?
Thank your for sharing 🙂