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Reader Email – Investing
By JLP | September 12, 2007
I recieved the following email from a reader:
Hi JLP,
I have a question in regards to your recent post, Controlling Your Fear of the Market.
I’m 22 and have a degree in Business Administration with a concentration in Finance. I’ve grown up following the stock from market from the tech boom in the late 90’s, to the fall out a few years back, to more recent times. My question/concern to you is about controlling fear in the stock market as well as trying to create a unique investing solution. I have my 401(k) which I have about $3,000 saved up within a year’s time. It’s properly allocated and I don’t check it that often since short term bumps in the road are irrelevant. My main focus is that I have about $8,000 in a non-retirement account that I’m looking to invest but have been scared off in light of the recent news about credit concerns. It brings back memories of the late 90’s when people saw their portfolios get hit hard even though they were properly allocated. I’m sitting cash right now in a money market yielding 5%.
So, my question to you, whom I consider a financial guru, what are some options of investing that $8,000 in my non-retirement account? I don’t plan on touching the money for a few years, but I’m hesitant about the market (not really to fond of taking the generic advice of riding it out) and think sometimes sitting in cash is a more attractive position that equities. By the way, if it helps, I have no debt, except a mortgage which I have well under control. Thanks for your thoughts and opinions.
–
Alex
I sent him an email asking for some specifics on his time horizon on his $8,000 and this is how he responded:
Well, on the exact years, that’s hard to pinpoint. I don’t plan on touching it for a minimum of 3+ years. My biggest fear (geez, I hate to use this word) is investing it now, watching the market go through a down year (or two), and be starting at phase 1 all over again, but with $5,000. I second guess myself on how many more years we can possibly see returns in the black before a nice “correction” occurs. We all know how much timing plays in not only investing, but life in general.
I don’t have a main purpose of the $8,000. Basically, I’m trying to maximize return for whenever another investment idea comes along. A few main ideas I have tossed around are:
- Down payment on an investment property (not sure on the time line. Possibly whenever an investment pops up. This is mainly why I am hesitant on pin pointing how long I won’t touch the money for). This idea isn’t anything concrete, just something that I’ve entertained since Arizona (where I live) has a pretty high foreclosure rate.
- Start up capital for a business venture.
- Keep investing it to maximize return.
Here’s my response:
You should not let the market bother you because you shouldn’t invest this money in the market. Why? Because your time horizon is only three years. If you didn’t need the money for AT LEAST 5 years, then the market might make sense. So, if you think you are going to need this money in the three years that you specified in your email, then you should keep it out of the stock market.
One thing you might be able to do to get yourself a better return is to look into purchasing CDs. You could purchase one CD or do a 3-year ladder. I’m not sure what rates you can expect but they might be worth looking into.
One final word of caution: be VERY careful investing in real estate right now. Make sure that you have the funds to keep you afloat in case things don’t turn around soon. Real estate is far from being free of risk.
Those are my thoughts. If you (AFM readers) have anything to add, please leave a comment.
Topics: Investing | 7 Comments »
September 12th, 2007 at 10:08 am
My advice is that the reader should pick an expertise to develop. If he doesn’t know about real estate then he better get educated before investing. If he doesn’t know about the market then he also better get educated. It really sounds like he wants to do something entrepreneurial, like a real estate or business venture he mentioned. These are awesome uses for the money but why wait 3 yrs in that case? Take a few months to learn, pick a small project, and get started.
For general “invest and forget” just go for the standard index funds. In that case forget the 3 yr time horizon and just come to terms with the fact that the reader is going to save and not invest.
September 12th, 2007 at 1:15 pm
Real estate would be fairly difficult now; value is more arbitrary in a turbulent market and would likely be a good savings strategy in 3+ years. Real estate has been on the rise since we were born in the 80s, so we’ve never really experienced a downturn in the real estate market (and thus real estate “experts” have no advice).
A 3-year CD interest rate isn’t that much higher than the current bank savings rate (I get 5% on mine at Citibank). If you really want to do something entrepreneurial, I’d get started now and experiment – it’ll give you experience for larger projects later on.
I have roughly similar stats as you, but I’m still investing a portion of my savings (checking/savings accounts both reached goal amount; 401(k) and stock purchase automatic) in the stock market because I am interested in it.
September 12th, 2007 at 2:08 pm
I tend to think of 5 years as being too short-term for stock market investments. You really need to be in for decades (plural) to reasonably mitigate the bad timing risks.
I’m not talking about time until retirement, but actual time invested in the market. Most people continue to invest after they retirement.
September 13th, 2007 at 12:24 am
so maintain the $8k as an emergency fund. or, put $4k in IRA, the other $4k as emergency fund.
September 13th, 2007 at 6:06 pm
i am a very nervous investor. NO RISK My financial advisor sold me Annuities. I want to see an increase each month on my bank statement. This isn’t happening. I am thinking of going to CD’s instead. Her argument is :With Inflation and taxes, I will get a negative return. Doesn’t the same apply to Annuities, just at a later date. Isn’t it true that at the end of say 5 years, I will probably earn more with a CD ? thank you
September 14th, 2007 at 1:58 am
I agree with you (and Dylan above) 3~5 years seems too short for getting into the market. If you pick of a 5 year window and travel backwards on the S&P, the last 5 years seem pretty good (even with the current tension); but one more 5-year-step back and it’s all trouble. In fact, look at the last 10 years, I have a feeling that you need to think at least 15~20 years before things can turn around and yield *enough* returns.
Also, the reader says “I’m trying to maximize return for whenever another investment idea comes along.” — sounds like he is looking for some liquidity. A high yield savings account might just be right for him [or if you think the interest rates are going to go down soon - a very good possibility btw; then a CD might probably work better]
September 15th, 2007 at 10:03 pm
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