If you’re asking yourself what to invest in right now, you’re not alone. Many clients ask me this question on a daily basis. They want growth and they want inflation protection and they want safety. Are they asking too much?
Once I became a financial planner, I learned a lot about people. What’s baffling is that people who are successful and intelligent are often reduced to utter bewilderment when it comes to making the right investment decisions now. Many smart people don’t even really know how to rate mutual fund performance correctly. The good news is that by the time you finish reading this post, you’ll know how to invest.
What makes decisions like these especially difficult? Consider the following pro and con arguments for stocks:
- Stocks have been on a tear since last 2008. Maybe the steam is all gone.
- In August 2000, the S&P 500 index stood at 1517. Almost 11 years later, the index is at 1279 – or 25% below its all-time high. Consider that fact from a “glass-half-full” vantage point. If you adjust that 1517 for inflation to consider where the market could be, we’ve got tremendous potential.
- The current P/E for stocks is in the neighborhood of 15 times earnings. That’s not cheap…but it’s not high either.
Now, when it comes to bonds, there are similar arguments on both sides. Interest rates are going to have to start climbing because inflation is heating up. That argues for possible declines in bond prices. But with the economy still struggling and unemployment stubbornly high, rates could stay low for quite some time. That argument would argue for holding a diversified portfolio of bonds. Maybe this is a good time to invest in dividend-paying stocks? How about preferred shares?
Are you interested in gaining some real insight and perspective? Here’s a post written during the correction of 2011 when the market tanked 20% – and some great pointers on how to apply the lessons learned.
Is it any wonder why you might find it difficult to make this decision? Besides the numbers, there are a lot of emotions wrapped up in this too.
In my opinion, there is only one rational way to decide, and that is to erase the word “now” from the question – even if you are retired now. In other words, forget about trying to predict what to do right now because it’s impossible to know. Instead, focus your efforts on your long-term strategy. Find the best investments for your long-term goals, not those which you hope are going to perform best over the next several weeks and months.
Want extra credit for expanding your investment skills? Try joining an investment club. This can be a good way to learn with very little risk. But understand what you are getting into before joining!
If you want to achieve a financial goal over the next 10, 20, 30 or more years, that is your time horizon. If that is the case, what does it matter what happens over the next several months? It doesn’t. Smart retirement income planning means thinking long-term. This requires a shift when you think about how much your investments will earn. Right?
Of course, there are catastrophic financial events which really hurt investors – especially if you are taking income out of your retirement accounts now. You can (and should) use a strategy that seeks to minimize the potential damage from these occurrences. But no matter what strategy you use, you can’t guarantee results. Sure, you might be able to reduce the pain, but if you invest in stocks and bonds, you can forget it if you think you can always end up on the winning side. Impossible.
You’ll be better off if you:
a. Get clear on your financial objectives and the corresponding time-horizon.
b. Understand all your investment alternatives and the risks associated with each.
c. Create a mini-financial plan to reasonably project out the possible results of your decisions.
d. Make the best decision now based on the information you get by the three steps I outlined above.
Don’t get me wrong. I am not a fan of buy-and-hold and I am also very wary of certain investments right now. But once my clients go through this four-step process and we agree on a broad allocation, we tend to stick to it and that serves them much better than trying to predict the future for bonds, stocks, gold or anything else.
Do we change the holdings? Absolutely. Do we shift the emphasis? You better believe it. But the one thing we don’t try to do is predict the future. More money has been lost by doing that than from any other endeavor.
What’s your investment strategy currently? Why?
FP Money Guru says
May 26, 2011 at 12:03 PMThank you all for the great pointers! I think it is also important to remind those new to investing that in order to be successful with bonds, having diversity within your portfolio is necessary in case a few interest rates do stay low due to things you mentioned like the economy and unemployment rates. A diverse portfolio of savings bonds would allow a greater probability that some rates would increase over times with inflation, and that growth would be beneficial, more or less depending on your time horizon, to work with down the road.
krantcents says
May 17, 2011 at 9:32 AMI stick with my asset allocation and dollar cost average into the market. I periodically review my investments and make some changes. My reason is over time, this strategy works for me!
optionsdude says
May 17, 2011 at 1:33 AMGreat thoughts. There is just no way to time the market so you have to have a plan consistent with your time horizon. I even like dollar cost averaging as well as asset allocation spreading your investments across different asset classes.