How to Invest Money and Where to Invest It
Hold your breath, but no one really knows how to invest money or where to invest for 2014, 2015 and beyond. Asset allocation is the name of the game for investors both large and small, and the near future looks challenging. Your success will depend on whether or not you know where and how to invest money across the asset classes.
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Think of asset allocation as HOW to invest. You can be conservative, moderate, or aggressive in pursuit of a long term financial goal like retirement. As to WHERE to invest, think of mutual funds if you are an average investor. The question is which funds and how much to allocate to each. Your three basic choices, in order from safe to risky are: money market funds, bond funds, and stock funds.
Now, why will knowing how to invest money for 2014, 2015 and beyond be challenging for investors? The reason is that none of the average investor’s three fund choices look attractive. With record low interest rates in the economy, safe interest-paying options (like money market funds) are paying next to nothing; and quality bonds (and bond funds) are only earning interest in the 3% range. Stocks and stock funds have been winners for 5 years running, in a lackluster economy that may be slowing down. Asset allocation and knowing how and where to invest is a tough call when none of the three basic asset classes looks attractive.
In hindsight, where and how to invest money actually was a pretty simple call up until 2014. An asset allocation of 50% to 60% in stocks with most of the rest going to bonds worked just fine for most of 30 years, and risk was moderate. Bonds and bond funds were steady performers, and often acted to offset losses for investors when the stock market got ugly. Actually, knowing where to invest and how to invest money has been a relatively simple proposition since the early 1980s. That’s when inflation and interest rates peaked… and then basically declined for over 30 years.
Memorize this: bonds and bond funds go up in value when interest rates fall. That’s the way they work, and that’s why they performed well for most of 30-plus years.
Looking at 2014, 2015 and beyond… investors could be in a whole new ball game if or when inflation and/or interest rates go up significantly. In 1981: short term CDs, mortgages, and high quality bonds and bond funds were all at 15% or more. Money market funds peaked at 20%! Compare that with today’s record low rates. How would a significant increase in interest rates affect your asset allocation decisions in terms of how to invest money and where to invest it?
An asset allocation of 60% stocks and 40% bonds would no longer carry just a moderate risk because rising interest rates would guarantee that bonds and bond funds would LOSE money. Higher rates mean lower bond prices (values). At the same time, it would be too aggressive for most average investors to load up on stocks and stock funds. The bull (up) market in stocks is more than 5 years old. Plus, rising interest rates can hurt corporate sales and profits — which tends to lead to lower stock prices. On top of that, if you are too conservative and safely sit on the sidelines, sooner or later you’ll need to decide how to invest money and where to invest it. Otherwise, you’ll never get ahead and achieve the growth necessary to reach your financial goals.
Average investors need a moderate asset allocation that they can be comfortable with in 2014, 2015 and beyond. Splitting your money between just stock funds and bond funds could be too risky for you going forward. The simple answer to where to invest hasn’t changed: money market funds (or another safe option), bond funds, and stock funds. But you might want to modify your strategy for how to invest money across these asset classes, in order to lower your level of risk.
A simple solution to how to invest money: spread your money equally across the three asset classes, one-third each. If you want to take things one step further, consider adding alternative investments like gold, oil, and other natural resources to your asset allocation mix. This fourth level of alternatives has sometimes been the answer to where to invest when the stock market gets ugly. There are specialty stock funds available to average investors that specialize in these sectors: gold funds, energy funds, and natural resources funds.
Above all else, realize that 2014, 2015 and beyond could be a different playing field if interest rates go up as many market watchers forecast. No one will really know how to invest money or where to invest it if rates take off — but by positioning yourself with a moderately conservative asset allocation you can avoid heavy losses. Then, when the dust starts to settle, you can start accumulating bond funds and stock funds when share prices are cheap.