Smart Investment Solutions for 2011 and Beyond

It’s hard to find investment solutions in this kind of market. Interest rates are ridiculously low. Real estate prices are predicted to decline further and what the stock market will do is anyone’s guess. This can be especially tough if you need income from your investments. What’s a smart investor to do?

Clarity

I don’t know about you, but I make better decisions when I’m crystal-clear on my objectives and the time frame over which I want to reach my objectives. Let me illustrate.

If you think that all your money should be invested to get the maximum return, I suggest that you are mistaken. Some of your money should be invested for maximum accessibility – not return. Think about the money you need to pay the mortgage and tuition. You can’t afford to invest that dough for a good return (and thereby invest it long-term) because you need to keep it liquid.

Now, let’s look at the money you have that you don’t need in the short term. You don’t want to make the greatest return on that money (over the short run) either. If you search for the highest return over the short run for long-term money, you’ll take on too much risk and likely be very disappointed with the results.

There is no way to know which investments are going to do well over the next week, month, year or number of years. Don’t even try. If you waste time and money trying to figure that out, you might get it right once or twice. But if that’s how you’re going to make investment decisions, you’re going to come out losing time and time again. This, of course, is no reason to despair.

You have in your hand the answer to what to do with your money if you understand what your objectives are and are clear about your time frame.

Most all of us need to invest for long-term benefits. Sure you also have short-term needs for money, but there is some portion of your assets that must be invested to create income over your lifetime. That is, by definition, long-term investing.

So, be clear on your time frame before you look for any investment solutions.

Once you understand which money should be invested over what time frame and what the intended result should be, you can start to make good decisions. Now that we’ve agreed on the pot of money that should be invested for long-term benefits, let’s look at what else we know.

We know that interest rates are very low and can either stay where they are or go up. The odds of seeing interest rates decline are low. This argues against investing heavily in long-term bonds. We also know that the market is “unknowable.” It’s fruitless to try to predict its direction but if you have a 10-year plus time horizon, the market is a reasonable place to consider investing.

We could argue about this forever but there are compelling reasons to feel good about investing with a positive expectation if your time frame is 10 years or more. I believe that the same can be said for real estate. With interest rates and prices low, who cares if prices decline over the short term? What difference does it really make to you? It doesn’t make a bit of difference so stop thinking about it.

If you can buy real estate in a decent market with reasonable prices and find good markets that have a strong demand for rentals, you can invest now and possibly really cash in down the line. You can find tenants and they will pay the rent for you. You’ll put a little cash in your pocket and, in a number of years, you’ll probably see the value of your investment in real estate increase significantly.

Alternative Investments

I have not been a huge fan of alternative investments due to the many times over my 28-year career that I’ve seen investors suffer because of these kinds of investments. But let’s take a look anyway.

If you believe that inflation is going to be a problem, you might look at natural resources, commodities and precious metals as a hedge. Of course, I strongly encourage you to own these assets by virtue of buying the right funds and ETFs. But if you go this route, make sure you review your mutual fund holdings. You don’t want to buy a fund or ETF that is more volatile than you can tolerate. You can get the diversification you need and still have liquidity. Will this market be volatile? Probably.

Again, I’m not trying to predict what’s going to happen over the next year or even several years. I believe that the market is really tough to call right now. The only way to make rational decisions is to think very long-term and use a strategy that is a good fit for your financial objectives, time frame and risk comfort level. This is very easy to say, but very difficult to stick with.

But you have to forget about the short-term results of your long-term plan if you want to successfully employ the investment solutions we’ve discussed above.