Wednesday, March 28, 2012

Fear and Greed make investing difficult

We are at a very interesting period from an investment standpoint.  In my 15 years in the business I have seen both ends of the spectrum; irrational exuberance for stocks at end of last century and a complete disdain for owning stocks over the past few years.  Back then, investors would not touch income oriented investments like utility stocks or bonds, today that is pretty much all they want to own.

When I started in this business back in 1997 we were at the end of a very long bull market.  The DJIA had moved from below 1000 in 1982 to just over 10,000 by the end of the 1990’s.   At the time I was at a small trading firm called Olde Discount Stockbroker, and our office managed somewhere around a quarter of a billion dollars.  What investors wanted to own back then is completely different from what they are investing in today.   Stocks were definitely in favor, more specifically technology stocks and to take it a step further internet and telecommunication stocks.  The NASDAQ peaked out at just over 5000 in March of 2000, and within three years would decline almost 80%.  Today, money is being invested into bonds even as interest rates
hit all-time lows.  In spite of these low interest rates, investors are perfectly content earning almost near 0% in savings accounts and less than 3% on ten year government bonds ( as of March 12, 2012). 

My contention is that although it is sometimes extremely difficult, maybe it is not always such a good idea to follow the crowd.  Interest rates are sure to rise in the near future; they certainly can’t go any lower than zero.  When they do, what is going to happen to the value of the bonds that you own?  And given the fact that everything we buy costs more every year, it is probably not the best idea to just go ahead and leave your money in a savings account paying nothing.  I am not suggesting that you completely ignore cash and bonds as a portion of your portfolio, what I am saying is that you need to plan for rising costs, and rising interest rates.  And if you are not able to make the correct decisions with regard to your retirement planning out of fear of the future, then it is in your best interest to consider working with a trusted financial planner.

Disclaimer:  Indices listed are unmanaged and cannot be invested into directly.  Past performance is no guarantee of future results.

Bonds are subject to market and interest rate risk if sold prior to maturity.  Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.

Stock invsting involves risk including loss of principal.