Wednesday, July 28, 2010

Where to Invest?

A major challenge for us in retirement has been to find investments with a good, steady returns during this economic crisis. We have not found any in which to invest. Here is an overview of the options that are available:
  • CDs and bonds Two to three years ago, it was possible to find 5 year CDs and bonds paying 4-5%. Now 5 year CDs and bonds are in the 2-3% range. Since I expect interest rates to be higher in the future, we have not recently purchased any CDs with long maturities.

  • Stock market. The stock market return from January 1, 2000, to December 31, 2009, has been -1%. With the volatility of 2008-09, it's been difficult to expect "historic" returns of 7-8%. Also, there seemed to be a reasonable probability of another economic slump.

  • Real estate. Other than our home, which has declined versus the purchase price, we have not seriously considered investing in real estate. For us, a real estate investment is too illiquid and requires too much attention and effort to maintain.
  • Since none of the above options were very attractive to us over the past year, we've been selling stocks into the current rally, and keeping most of the proceeds in money market funds, which only pay 0.05 -0.1%.

    However, my opinion of the stock market has changed in the past couple weeks. Based on the recent earnings reported, I believe that many companies have already recovered from the recession. For example, on July 13, 2010, Intel reported it's highest earnings ever for a quarter. Many other companies, such as Caterpillar, are reporting robust demand for their products.

    While the market has not fully reflected the strength of earnings reports, we plan to put funds back into stocks over the next year, in anticipation of continued business recoveries. We'll add the funds in stages, about 10% at a time, in case pull backs occur. Hopefully, by mid 2011, the stock market will be experiencing another bull market :-)

    For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

    This is not financial or investment advice. Please consult a professional advisor.

    Copyright © 2010 Achievement Catalyst, LLC


    pfstock said...

    I wanted to make a comment about CDs. I recently opened a 5-year CD at Ally bank that yields 2.94%. You may think that it is not a good idea to lock in such a mediocre interest rate for 5 years. However, it is much better than any short-term CD or money market available.

    The second part of the equation is that Ally charges an early withdrawal penalty of 60-days simple interest if you close your account prematurely. I did some research and found that this is one of the lowest early withdrawal penalties available.

    If CD or money market rates go back up to the 4-5% range, I will close the CD account, pay the penalty, and establish a new account at the higher rate. I already did some back-of-the-envelope calculations that show I would be much better off doing that even after having to pay an early withdrawal penalty (which is also tax deductible as an above the line deduction).

    I was going to write a post about this topic on PFStock, but haven't gotten around to it yet. Good luck to you.

    Super Saver said...

    @ PFStock,

    Thanks for the tip. I will look into the Ally CD as one of our options.