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Dave’s Investment Blog » Blog Archive » Where Should You Invest For the Next 3 to 5 Years?
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Where Should You Invest For the Next 3 to 5 Years?

This is a question many investors are asking as they peer out from their fox holes. It’s a rational question after the punishing assault and destruction of their retirement accounts, the market value of their homes, and their taxable investment accounts. Only their bank accounts have survived this financial Tsunami because all taxpayers in the United States are financially liable for these deposits in the event the institutions that hold them become bankrupt.

Where are you going to invest to make a return greater than inflation and taxes?

Let’s look at the major choices an investor has, real estate, cash, bonds, precious metals, commodities, and stocks.

What is the midterm outlook for real estate? With the current supply of private housing available at best housing prices will stabilize somewhere in the future. The long term rate of price appreciation of housing is close to the rate of inflation. Longer term because of the destruction of our housing manufacturing capacity, housing may see rapid appreciation once demographics absorb the excess supply of houses. Commercial real estate has challenges in the midterm as well.

How about cash? Money Markets might pay about 2.85%. Current inflation is 3.66%. If you are paying 28% of your earnings in taxes, your after tax return on your money market is 2.052% (2.85% x (1-.28)). After inflation lowers what your dollar will purchase you are losing 1.608% per year by keeping cash in a money market.

If you are using funds in the next twelve months, those funds need to be in a money market or a short term certificate of deposit.
What about bonds? A U.S. Government bond that matures in 5 years is currently paying 1.629% per year which is less than the money market. Also bonds are highly priced. You might be buying at the high.

An investor could purchase a corporate bond either investment grade or high yield. Both of these investments do offer higher returns with greater likelihood of not getting the original investment returned.

Let’s look at precious metals and commodities. For the sake of brevity I will combine these two classes of investments. The primary driver of price for these items is supply and demand. If we are in the midst of a global recession, demand for both these items will be decreasing. Until supply readjusts to the new demand, prices will be dropping. For example oil was $140 per barrel, now it is below $50 per barrel. Gold was $1004.4 per ounce, now it is about $769.50 per ounce.

This leaves stocks, clearly a painful choice. Most investors had stocks and many have sold their stocks. If they haven’t sold their stocks they don’t like looking at them because from their highs in October 2007, as measured by the S&P 500©, stocks have fallen 44.3% which hurts.

Please think this way on stocks, let your pain be your path to gain! My coach always said no pain, no gain. How about yours?

Stocks are undervalued by 53% which is how much they will rise in the next 12 to 18 months. As of today stocks are 14.5% above their low in the last month which is also the low for the last twelve months and the low for the last 5 years. Make money by buying low and selling high.

For buying the S&P500© now you get an earnings yield of almost 9% plus a dividend yield of 2.14% for a combined return of 11.14% which is an after tax and inflation return of 4.361% now! Much better than losing money in a money market account.

If you want to get an even better return subscribe to DavesFavs.com

Have a very profitable Day!
Dave

2 Responses




  1. There is also another option to buy foreign currencies that are expected to appreciate in value for the next 5 years, like China RMB.

  2. Dave




    Thank you for your reply. Another option is to buy foreign currencies.

    An investor can also achieve the benefits of investing in undervalued currencies through investing in equities in the foreign markets whose currencies are undervalued.

    By investing in foreign equities, an investor gains profits from profitable companies based outside the United States and diversifies their currency risk.

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