Don’t feel like a loser if investing money has not been real profitable for you lately and you have no idea where to invest for 2012 and 2013. Investing has been a rough ride for a dozen years and even the pros don’t know where to invest the money (billions) they manage. Here we talk about investing in CDs, bonds, stocks, and gold.
Ask yourself where you would invest money for 2012 and beyond if you managed a multi-billion dollar investment portfolio for a large pension fund. If you can’t make an average return of 8% or so over the long term on the money you manage, tens of thousands of retirees (present and future) could suffer because your plan is under funded. Bonds have kept you afloat for years, as the stock market has been disappointing. Investing money for the average individual is not much different. Let’s look at the past dozen years and try to get a handle on why investing today is a tough proposition; and factors to consider when you invest these days.
Can you make money today in safe 6-month CDs? A dozen years ago they paid 6%, and in early 2012 they paid less than ½%. How about investing money in more bonds? The safest bonds in the country (10-yr Treasury notes) have fallen in yield from 6% to less than 2%. Because interest rates have fallen bond prices have gone up, and bonds have been a good place to invest. When rates go back up investing in bonds will be a losing proposition. That’s how bonds work. With our national debt zooming from less than $6 trillion to over $15 trillion in this time period and yearly deficits still climbing, will investors be willing to lend Uncle Sam money (buying our T-notes and T-bonds) at such low interest rates in the future?
How well did investors do investing in stocks over the past dozen years? In round numbers, the Dow Jones Industrial Average went from 11,000 to about 13,000 in early 2012, up less than 20%. During this time the U.S. stock market suffered through two horrendous bear markets while gold soared from $300 to over $1750 an ounce, up almost 500%. Of our four alternative ways to invest, gold was definitely the winner over the past dozen years.
Before you invest money in gold at these record high prices consider the down-side risk as well as the upside potential. Gold would need to rise to $3500 for you to double your money. Up until about a dozen years ago gold prices were treading water at best. A reversal in prices could create heavy losses. Bonds could be a risky place to invest in 2012 and beyond as well. Investing money in bonds has been a cake walk since interest rates peaked and started falling 30 years ago. A reversal in trend could clobber pension funds as well as individual investors. WHEN RATES GO UP BOND PRICES FALL.
One-year and 6-month CDs might not look attractive at today’s rates, but at least they represent a safe place to invest money in 2012 and 2013. Stocks are the wild card for 2012. They are relatively cheap based on earnings per share, even though growth in corporate sales and profits has recently slowed. On the other hand, large institutional investors (like pension funds) in search of where to invest for higher returns and growth tend to favor stocks. If they continue to invest large amounts of money in the stock market prices should continue to climb.
Investing money in 2012 and beyond will be challenging. Above all else, beware that bonds are not really a safe place to invest money. They have had a good track record for years only because both interest rates and inflation have been investor friendly. If there is a change in trend, bonds will not be your friend. Shorter-term CDs will be where to invest for safety. Stocks are likely the best place to invest for growth.