Should you invest in stocks? That’s probably the most salient greed v. risk question facing us today.
The U.S. stock market is up, way up, with the Dow Jones Industrial Average almost a thousand points above its dotcom bubble-era peak. But many experts are saying it still has a lot of climbing to do, as valuations are still relatively low.
Bloomberg News reported this morning (2 April 2007) that three of the biggest money managers – BlackRock, Fisher Investments and Schroders – stated that stocks are inexpensive relative to bonds and that the profits of major U.S.-listed companies are rising faster than share values. The economy is still strong, they say, despite recent problems in the subprime-mortgage-lending business, and share prices should keep going up.
They will rise as much as 9 percent this year, the Blackrock money manager said.
In contrast to these cheerleaders, you have the economists from Morgan Stanley, Nomura Holdings and HSBC Holdings who are much less optimistic. They say declining business spending will hamper growth and share prices won’t rise nearly that much.
One very successful money manager who oversees US$1.6 billion in investments agrees with former Fed Chairman Alan Greenspan’s prediction that there’s a one-in-three chance the economy will go into recession this year. The problems in the housing sector will drag down consumer spending for some time to come, he said, and share prices could fall as a result.
So who’s right? More importantly, what should you do? Do you buy stocks or not?
Here’s a way to straddle the fence and benefit from both potential outcomes: Put your money in cash AND stocks.
What I mean by “cash” is a money market fund. This is basically like a savings account at your local bank except that it earns far higher interest. If you buy into a money market fund with a mutual fund company like Vanguard or T. Row Price you can earn a bit more than five percent a year.
This may not seem like much, but your money will never* go down, only up. That means you won’t have to sweat every time there’s a dip in share prices.
A five percent return is not that bad if you look at it in terms of share prices. This is the equivalent of the Dow rising to around 12970 (from 12354 today). How likely do you think that will happen in a year’s time? If you invest in a money market fund you will virtually guarantee such a return.
Now I said “cash AND stocks.” Here’s the “stocks” part: Use all new savings to buy shares. You put existing savings into a money market fund and new savings into stocks.
The beauty of this arrangement is that if you already have a significant sum in savings you can “lock-in” the gains the stock market has already made, while still benefitting from future rises in share prices. The risk is low, but you’re still in the game.
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*(OK, you could lose all your money if the money-market provider goes under – these investments are NOT federally insured – but the chance of this happening is remote. Be sure and pick a reputable, well-established financial institution. If you want something that’s federally-insured, put your money in a savings account. The interest rate may be lower, however.)
NOTE: You invest at your own risk. The author and this website cannot be held responsible for any investment losses incurred by readers of this article.