I’ve been telling you it’s a bad time to invest in the stock market (even in index funds for now), so exactly where and how should you invest your money for the time being? Retirement money and other savings should basically be in very short term fixed income investments right now. But let’s break this down and understand where to (and not to) invest your money while returns are so painfully low, while still protecting them from unstable markets and likely to lose investment opportunities. I know it’s rough to even contemplate returns so low they don’t even make up for inflation, but most of the successful investors I know personally are doing what I am right now and are holding out until better returns can be achieved and most importantly keeping our money secure. We sit here waiting for the game to shift and the next opportunity to arrive, as they always eventually do.
This is the first time in that last 30 years that I’ve been unable to recommend good alternatives. In the 80’s the clear choice was real estate, in the 90’s the stock market, 2000-2005 it was real estate and 2006 until now, fixed income. Each of these choices was clear to me and each one worked out great.
So is there nothing? No alternative? Unfortunately, the answer is that there really isn’t much, and the investments that might be worth risking, such as starting or buying a business or investing in residential rental properties are very tricky turf that require a lot of very thorough homework or it won’t go well.
Here is my take on each of the major investment alternatives at this time:
The U.S. and global stock markets: The risk is far too high that sometime in the months to come the stock markets of the world will drop a lot, 20% to 30% and possibly more. All you have to do is look at the world’s economic realities to see this. The financial service industry and the government, aided and abetted by the majority of the financial media, are incredibly effective at spinning world events and realities to their own benefit. At some point, however, the facts will overwhelm their spin. For more about why I say this, check out the Right Now and U.S. Stock Market sections of my Market Evaluations webpage.
Bonds, bond funds, CDs: A truly bad alternative at this point are bonds, bond funds and long term CDs. The federal government continues to loan the banks all the money they want at zero percent, so why should the banks pay you anything? Rates aren’t going lower because you can’t go lower than zero, and at some point must begin to rise, and a lot. The effect will be that the value of any investment (your principal) you have in mid to longer term fixed income will drop, and by a lot. For more information on this, check out my post, High Inflation is Coming—What to Do.
Gold: Gold is in the grips of traders at this point and short term price moves are way too unpredictable. It could as well rise a lot as drop a lot. Given this, the best move is to stay away unless the price drops a lot more, say to the $1250 to $1300 range. When the dollar begins to erode, which it will at some point, I believe gold will be worth investing in, but only a modest percent of assets, say 10%. For more information check out my post, Should I Invest in Gold?
Other commodities: The price of oil, grain, metals, etc. will drop quite a bit further as the world’s economic situation continues to deteriorate. At some point commodities will become a good to very good investment, but not yet. For more information, check out the Right Now and Commodities sections of my Market Evaluations webpage.
Commercial Real Estate: For the most part commercial real estate is a huge loser as an investment. The internet is and will continue to grab more and more retail dollars, more people will be working from home, either full or part time, and industry continues to migrate overseas. This leaves an ever-growing surplus of vacant commercial properties. Landlords will be continuing to slash their rents to fill their vacancies, luring away other’s tenants. Even if you really know the turf and do a heck of a lot of homework, you’re extremely unlikely to find a workable situation that can handle these shifting circumstances. The bottom line is to stay away.
A personal residence: Expect that prices in the majority of our housing markets will drop a little further yet and prices will remain bottomed for at least several more years, and possibly quite a bit longer, as the huge inventory of unsold homes is slowly absorbed. Also, if your reason for buying is that a home is always a good investment, do not buy into that idea. History shows a home is a great savings bank, great forced savings, but that the value of homes generally tracks the rate of inflation and nothing more. Nevertheless, if you wish to have your own personal residence, you meet the requirements involved, and are extremely thorough in doing your homework to insure you’re getting a really good buy, then I think it’s now finally become an acceptable and perhaps desirable investment to make.
I say this for two reasons. First, after reliably forecasting continued price drops for the last 6 years while the vast majority of the “experts” did exactly the opposite, I do believe we’re getting close to the bottom. Second, and a truly critically important factor, is that right now you can still get a 30 year fixed rate mortgage at an absurdly low rate. Inflation will come and you’ll get to pay off your home at 50% to 60% on the dollar. I see this as a game tipper, so go buy yourself a home provided, of course, you meet all of the requirements covered on my website and in my book.
Residential rental property: The same factors just covered under personal residence apply here. If you can buy a property in a good area that gives you a 6% return on your money, assuming a conservative estimate on vacancy rate and no increase whatsoever in the value of the property, we’ve reached the point when this can be a worthwhile investment. Just be sure to be extremely thorough with your homework and I can’t stress enough how important this is for success.
Starting or buying a business: I expect very difficult times for years to come. For the most part it is definitely not a good time to start or buy a business. Nevertheless, if you have the desire to do so, know what you’re doing and do your homework it may still be a very good thing to do. Once again, be sure to be extremely thorough in your homework and factor in a very significant drop in the economy. If your idea survives these tests then it may well be a very good investment.
Investing in your career: Investing in your career can be a great alternative for a lot of people, but again, great caution and extremely thorough homework are critical for success. The majority of the education industry, both public and private is focused on its own interests, not on seeing to it that what you learn helps you get a good job. The results show it. 50% of last year’s college graduates were unable to find a meaningful job. 50%! At the same time, something like 35% of the job vacancies (and we’re talking millions of jobs) go unfilled because employers can’t find candidates with the necessary skills or experience. Wow! What this tells you is that there can be no better investment than investing in yourself, but you must be extremely careful to insure that the education you get sets you up to be in demand in the real world.
By the way, parents, this same advice goes for your kid(s), too!
For now, I believe the best bet is to keep your powder dry and your money safe until the next good investment opportunities show up. Stay primarily in very short term fixed income investments, pay off any and all debts except a low rate real estate mortgage, and keep saving as much as you can. Be sure to see my site for how to save a lot more. Follow the Money Rules and the real-world game plan contained in Money Smart and I am confident you will find there is a lot you can do to succeed with your money.