Monday September 1, 2008
What Kinds of Investments Make Sense Now?
Many investors are reeling from the stock market’s latest gyrations. One man told me he had lost hundreds of thousands of dollars of his retirement nest-egg when stock prices recently tumbled. Another lady at a local investment presentation told me she had lost about one fifth of her savings due to falling prices as well
Whether large or small in size, a great many investors have lost money in the market recently. So what kinds of investments make sense right now? Is this a good time to go into stocks? Is this a good time to add to your stock positions now?
In my book “Cash-Rich Retirement”, I make a strong case for investing in income-producing investments — and most definitely in stocks (or in mutual funds or exchange-traded funds containing stocks) that pay dividends.
I also recommend putting about half of your savings into stocks and staying put in a broadly diversified stock position unless there are clear signs that the stock market is overheated. It is not overheated right now.
According to data from Yale University’s Dr. Robert Shiller, the U.S. stock market now has an average price-to-earnings ratio of about 20.67. That means that investors are currently paying about $21 dollars to buy $1 of a stock’s earnings.
By comparison, investors were paying $26 for $1 of stock earnings in August of last year — and that earlier measurement, yes, was an indicator of some overpricing.
Given today’s lower stock prices in relation to corporate earnings, this is a good time to buy high-quality stocks provided they pay dividends and provided they have well priced relative to earnings.
But the stock market is still correcting. It‘s also moving up and down (and down and down) because of investor jitters and negative news about the economy. Holding stocks still has risks, and you can and will still experience periodic whiplash.
Even so, I believe that being invested in income-producing stocks “for the long haul” makes good sense. So, yes, it is a good time to buy stocks provided you stay focused on high-quality, income-producing stocks that are attractively priced.
As my prior postings here have also suggested, however, we’re beginning to experience a threat more formidable than a mini market correction. Groceries and fuel prices are going up and up. In fact, most of us are seeing prices for just about everything on the rise even if gas prices are thankfully lower.
What we are seeing and experiencing first hand is rising inflation — the erosion of our money’s buying power.
Income-producing stocks are a good investment. But I believe it is even more important right now to be concerned about having inflation protection built into your portfolio. Inflation is the force to be reckoned with.
In “Cash-Rich Retirement”, I suggest specific percentages of your money that you might consider putting into “inflation-offset” investments. There are four broad kinds: (1) gold and precious metals funds, (2) U.S. Treasury Inflation Protected Securities [“TIPS”] funds, (3) sovereign non-U.S. inflation-protected bonds (the inflation-adjusted bonds of other countries), and (4) U.S. “I-bonds”.
I have written about the first three kinds in the book and in earlier postings here. [Check my “Inflation-Offset Investments” article posed in May.] However, I have not explained “I-Bonds”. Let’s spend a moment to talk about them now.
I-Bonds
“I-bonds” are U.S. Treasury bonds that are periodically adjusted for inflation and suitable for small amounts of money. You can purchase “I-bonds” from banks or directly from the U.S. Treasury on line. They are available in many different denominations ranging from $50 to $5,000 (i.e. $50, $100, $200, etc.) — but each person can only buy a maximum $5,000 of these bonds each year.
I-bonds adjust for inflation twice annually. However, you only receive interest payments and inflation adjustments from these bonds when you sell or redeem them.
You can also buy I-bonds with maturities of 5, 10 or 20 years. And they are for sale “at face value” — meaning that you pay $50 for a $50 bond.
Because I believe inflation will significantly strengthen and trigger higher interest rates, you’re better off buying bonds of any kind with short maturities so that you’re not locked into today’s low interest rates for a long time. That means that if you decide to buy I-bonds any time soon, you should opt for the 5-year maturity.
I-bonds give you tax advantages, too. Federal taxes on I-bond interest and inflation adjustments are deferred until you sell. And I-bonds are exempt from sate and municipal taxes. [But be sure to consult with a tax specialist or the U.S. Treasury about my tax observations before you buy. The tax treatment for these bonds could change.]
There are, however, penalties for the early sale of I-bonds. You cannot sell them for one year. And if you redeem them within the first five years, you will forfeit the three most recent months of interest.
So I-bonds are a “buy-and-hold” kind of investment. They are not going to make income payments to you while you hold them. But they are a good way of shielding small amounts of “I-don’t-need-it-now” money from inflation.
If you cannot afford large positions in other inflation hedges such the “TIPS” and gold funds, I-bond can help you. And if you are going to give friends or relatives a birthday, graduation or wedding gift, I-bonds may be a very smart option.
Check out the U.S. Treasury’s website to learn more about I-bonds and their advantages. And make I-bonds part of your overall array of inflation defenses. This may be a good time to add to your stock positions, but it a definitely time to strengthen the inflation-protection for your savings.
<< Previous Article Next Article >>
The information and views contained in this column do not represent a recommendation or solicitation to buy or sell any particular security or fund.
At the time of publication, the author may or may not have held any of the investments cited. His holdings may change from time to time. The opinions and recommendations expressed in these articles may likewise change from time to time without prior notice. Hence, readers are urged to conduct their own, independent research and consult their personal investment counselors before making any investment decisions.
Past results are not a guarantee of future outcomes. Investments of any kind can result in losses. When considering any investment, you should independently judge the content, management, fees, tax implications, historic performance, and risk factors of the investment and, in particular, read its prospectus and/or other offering materials.
The communications, comments, and opinions contained herein are intended solely for informational purposes. Mr. Schlagheck and this blog are not responsible for the accuracy, timeliness, or soundness of the information provided. All of the above commentary comes without warranty or guarantee of any kind. Neither Mr. Schlagheck, this blog, nor any other party can be held responsible for the validity, accuracy, or efficacy of these views or for the investment performance resulting therefrom.