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Dave’s Investment Blog » 2010 »
Dave’s Investment Blog
Welcome at » 2010 »

If you have money that you want to optimize your rate of return or have the most gain while maintaining some diversification, where should you invest it? These are funds that you do NOT anticipate needing in the next five years or more. They may be in your IRA, your retirement account, brokerage, or other type of savings account.
In general you might invest in commodities, real estate, fixed income, or stocks.
Stocks or equities still offer tremendous upside and will probably provide higher returns than commodities, real estate, or fixed income over the next 5 years.
Fixed income is any investment where the terms of what an investor receives is fixed by a legal contract. Examples of fixed income include government bonds, bank certificates of deposit, corporate bonds, annuities, and guaranteed insurance contracts. Mutual funds that invest in fixed income instruments are NOT fixed income. They are equity shares in a managed pool of fixed income investments. There are NO guarantees of return of principal or interest payments in a bond fund. A bond fund is NOT a fixed income investment.
Does anyone think interest rates will go lower? Can the Federal Reserve set a rate lower than zero? Do you want to invest in a bull market that has been going on since 1982 which is 28 years old?
If interest rates go up, the market value of bonds will go down. If you answered no to the previous 3 questions then you probably believe at best interest rates will stay at current levels. Actually in the last year the rates on the 30, 20, 10, and 5 year bonds have all increased. It’s more likely that interest will continue to rise. The questions are for how long and how high they will go up.
As interest rates rise the market value of fixed income investments will drop. While an investor who holds their fixed income investment until maturity will receive their principal and interest under the terms of their purchase, they will suffer opportunity costs. Do you want to own a 3 year Certificate of Deposit yielding 3% when you could earn 4% on a two year Certificate of Deposit?
Fixed income is not the place to make money over the next few years. It is a great place to keep your funds for a short time because you are going to spend the money within the next 5 years or less.
Buy guarantees from qualified guarantors. I like the U.S. Government. Do not place money you expected returned to you in a specific time in a bond fund. Bond funds should be used only in rare special circumstances.
Real estate has improved in some markets. Real estate is less liquid. It is difficult to liquidate only 4% of a real estate investment. Currently there is an abundance of housing, commercial space, and raw land. Until these conditions change in the specific geographic area you are investing in real estate appreciation will be capped around the rate of inflation. I am referring to investing in real estate which is different than deciding whether to buy a home or rent a home. Buying or renting is different than investing in real estate.
The International Monetary Fund (IMF) forecasts commodity prices to rise at 5.8% this year and 1.6% next year. While some traders will make good returns, they could probably do better trading futures on the equity markets.
The IMF projects World Output to grow by 3.9% in 2010 and 4.3% in 2011. The growth in World Output should drive an increase in earnings of the S&P Global 1200. The increase in earnings should drive price appreciation of at least 10% per year for the next two years. Price appreciation may be greater than 10% because the current price of the S&P Global 1200 is undervalued relative to the future net profits of its constituents.
Therefore a rational probability of attaining better than 10% per year gain in the market value of the S&P Global 1200 without any leverage exists. A greater than 10% return in equities is a better return than 2 year treasuries offered at .99% per year, commodity prices rising at 5.8% this year and 1.6% next year, or the real estate market in the United States. The real estate market is still confronted with too much supply and is likely to appreciate at less than 3% per year.
There is still a large amount of cash on the sidelines waiting for a retreat in stock prices.
In 2009 bond funds were positive on cash flows into them. In stock funds, more money was withdrawn than contributed. Money markets are paying .81% per year. These are NOT the conditions for an equity market top. These are the conditions of a bond market top!!
As the lagging mob reacts to the declining returns in their bond funds and the pain of missing the rise in equity prices, funds will move from bonds to equities. This will fuel a further rise in equity prices.
While the global stock market has made significant strides in the last 12 months up over 50% in the last 12 months, it needs to go up another 40% just to approach it’s fair value.
For investors with funds they do NOT plan on consuming over the next 5 years, I’m recommending an allocation of 98% equity and 2% cash.
For which equity investments, join DavesFavs.com
Have a wonderful Day!
Dave