Knowing how to invest money in 2010 and beyond is crucial, because if you invest money too casually or invest too aggressively you’re asking for trouble if we revisit the credit crisis. Knowing how to invest in good times is one thing; and how to invest money in 2010 and beyond is quite another. Here we cover safe investments, bonds & bond funds, and stocks & stock funds with emphasis on funds.
Sovereign debt has become an issue. Some countries in Europe are awash with debt, and they are not alone. The U.S. has $12 trillion in debt, $40,000 for each person in the USA. Like the emperor’s new suit… the truth is now obvious. With interest rates at historical lows and inflation benign, how does anyone in financial trouble, including a country, borrow money to stay afloat? By paying higher interest rates to offset the risk of default. So, here’s how to invest money in 2010 and beyond while protecting yourself.
First, how to invest in safe investments. Keep a modest amount of money liquid for emergencies in a money market fund or savings account at the bank. Then, with the bulk of the money you have earmarked for highest safety, shop for CD rates. Here’s how to invest in CDs to earn better rates without tying money up for several years at a fixed rate. No one wants to pay penalties for early withdrawal, or to sit on a fixed rate as interest rates go up.
Build a CD ladder. For example, let’s say 1-yr, 2-yr, and 3-yr maturities pay 1%, 2%, and 3% respectively. Invest money in equal amounts in each initially… then rolling over the proceeds from maturity each year into a new 3-yr CD. Each year you will have a CD maturing, you’ll be taking advantage of the 3-yr higher rate each year, and as rates fluctuate you will be going with the flow. Now the question is how to invest money in 2010 and beyond to earn even higher interest income in bond funds, without high risk.
Bonds and bond funds have paid higher interest, and have been relatively safe long-term investments since interest rates peaked in the early 1980’s. You could earn a fixed 15% interest rate in high quality bonds issued back then, compared to as little as 5% in 2009. As rates fell over the years, bonds in general gained in value as well. The opposite will happen when rates go up. The price or value of a 5% bond will fall when investors can get more from new bond issues.
Bond funds were very popular in 2009 as investors chased higher interest income. Don’t chase yields and avoid long-term bond funds, because they will get hit the hardest when rates go up. Remember, bond interest rates are FIXED and you don’t want to own a fund holding long-term maturities of 10, 15 years or more. Shorter term maturities of 5 years or so are much safer because they mature in a few years and pay the bondholders (like a bond fund you may have money in) back their principal. So, invest money in short-term and some in intermediate-term bond funds vs. longer term funds. Then, consider the following.
Interest rates and inflation often move in lockstep. Higher inflation makes future interest payments to bond investors less valuable and causes bond values to fall as well. An INFLATION-PROTECTED SECURITIES FUND holds government debt securities (like bonds) that adjust their principal and interest payments over time to changes in the inflation rate. Give these funds serious consideration.
The first two investment categories were easy compared to: how to invest money in 2010 and beyond in stocks. For most investors equity (stock) funds, like bond funds, are the best investment because they offer diversification and professional money management. The question here is which equity funds to invest money in. Don’t invest only in diversified domestic equity funds like many investors do (these invest in the U.S. stock market). Go international and get into specialty funds as well to cover all the bases.
First, definitely invest money in a diversified international fund if you don’t already own one. Then invest modest amounts in the following fund types or specialty fund sectors: emerging markets, gold, energy, real estate, and basic materials. The major no-load fund companies are a good place to invest for variety and low-cost investing: Vanguard, Fidelity, and T Rowe Price. To cut costs even more buy index funds in any category you can find them.
If good times roll the above suggestions should at least put you in a well balanced position. If times threaten to get worse, you should be sheltered from the heavy losses many investors will take.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.