What to invest in?
September 25, 2010 4:51 PM Subscribe
Considering the future of the US economy, if one had a very large windfall of cash what should one invest in today for a steady, long-term income?
Given a large sum of cash, say 40 times one's annual salary, what is the best asset class to invest in to give a relatively safe, steady income for the next 50 years? This is considering the state of the US economy and its long-term future (major inflation or deflation?). Stocks, bonds, cash, real estate or perhaps something else altogether?
Given a large sum of cash, say 40 times one's annual salary, what is the best asset class to invest in to give a relatively safe, steady income for the next 50 years? This is considering the state of the US economy and its long-term future (major inflation or deflation?). Stocks, bonds, cash, real estate or perhaps something else altogether?
Personally, I am betting on deflation, so government or highly-safe corporate bonds would be my guess. The nominal rates are very low, but if there is deflation then you are getting higher effective rates. In reality, though, no one can tell you for sure.
posted by procrastination at 5:05 PM on September 25, 2010
posted by procrastination at 5:05 PM on September 25, 2010
Index funds
posted by Cool Papa Bell at 5:06 PM on September 25, 2010 [2 favorites]
posted by Cool Papa Bell at 5:06 PM on September 25, 2010 [2 favorites]
Isn't the question: Where can I get a 2.5%APR of return on my investment?
posted by Wild_Eep at 5:12 PM on September 25, 2010
posted by Wild_Eep at 5:12 PM on September 25, 2010
30% Stocks
30% Gilts/Bonds
30% Real Estate
10% cash
posted by Lanark at 5:16 PM on September 25, 2010
30% Gilts/Bonds
30% Real Estate
10% cash
posted by Lanark at 5:16 PM on September 25, 2010
Two problems with stocks: first, they do not return a stream of income as effectively as bonds unless you go out of your way to pick ones with high dividends (this is effectively what Mutant does). Instead, you have to sell them to bring in money which means you are highly subject to the effects of volatility. The year you have to sell when the market is down 40% is going to hurt.
Second, all the research that shows stocks as outperforming bonds in the US also pointed out that stocks never lost money over a ten-year period. That is no longer true.
So I stick by my answer of no one knowing. History says stocks provide the best overall return, and that index funds are the way to get the most diversification at the lowest cost. But that may no longer be true in the US. It hasn't been in Japan since their somewhat similar financial crisis in the 90s.
posted by procrastination at 5:59 PM on September 25, 2010 [3 favorites]
Second, all the research that shows stocks as outperforming bonds in the US also pointed out that stocks never lost money over a ten-year period. That is no longer true.
So I stick by my answer of no one knowing. History says stocks provide the best overall return, and that index funds are the way to get the most diversification at the lowest cost. But that may no longer be true in the US. It hasn't been in Japan since their somewhat similar financial crisis in the 90s.
posted by procrastination at 5:59 PM on September 25, 2010 [3 favorites]
to say that stocks shouldn't outperform bonds over the long-term is argue that there is no trade off between risk and return. Also your data is wrong. There have been prior ten year periods in which bonds outperformed. Historically those times were incredibly good times to invest in equities (74, 82, there were a few more pre WWII)
Your point on volatility is of course correct and why the answer to a question like this is never a flip "stocks".
NB. Buying high dividend stocks is just a variant of buying low P/B stocks. In a perfect world they would be exactly the same thing, but corp mgmts tend to do a worse job of allocating capital then their cost of equity.
posted by JPD at 6:07 PM on September 25, 2010
Your point on volatility is of course correct and why the answer to a question like this is never a flip "stocks".
NB. Buying high dividend stocks is just a variant of buying low P/B stocks. In a perfect world they would be exactly the same thing, but corp mgmts tend to do a worse job of allocating capital then their cost of equity.
posted by JPD at 6:07 PM on September 25, 2010
oh and to be clear - the reason why equity is riskier has nothing to do with price volatility (although that is how it manifests itself) but rather because it is the botton of the capital structure, and thus a residual of the firm value after all other liabilities are repaid.
posted by JPD at 6:09 PM on September 25, 2010
posted by JPD at 6:09 PM on September 25, 2010
Something outside of the US economy, probably.
posted by aeschenkarnos at 6:22 PM on September 25, 2010
posted by aeschenkarnos at 6:22 PM on September 25, 2010
Bonds and exchange-traded funds. This is a great transcript about the market conditions for both that I really learned from. You can invest in gold of course, but the reality is that the return on a $1300 investment versus having bought gold when it was $1,000 is hard to deal with if you are looking for a return. There are fewer stocks now that have a related return on value from dividends (BNSF was a favorite for me) but bonds, especially municipals such as California and New York are great value and have a 7% takeaway. Do your homework. There are lots of forums for bond trading on the internet where you can communicate with other investors without feeling like you are being shopped.
posted by parmanparman at 6:24 PM on September 25, 2010
posted by parmanparman at 6:24 PM on September 25, 2010
OOPS! Here is the link to the transcript, it's from Nightly Business Report. I really cannot recommend NBR more highly, they do a great job of sorting out good advice from bad.
posted by parmanparman at 6:25 PM on September 25, 2010
posted by parmanparman at 6:25 PM on September 25, 2010
But that's bad advice. She's shilling a junk bond ETF when credit spreads and interest rates are all time lows. You make money on junk bonds when credit spreads are wide or rates are high. There is literally no way to win with that investment. Gold is also a terrible answer. Putting aside my own opinions on gold, or my own opinions on buying the best performing asset over a prior time period, OP is looking for income, gold does not produce income.
posted by JPD at 6:31 PM on September 25, 2010
posted by JPD at 6:31 PM on September 25, 2010
buy farmland
posted by dougiedd at 6:32 PM on September 25, 2010 [1 favorite]
posted by dougiedd at 6:32 PM on September 25, 2010 [1 favorite]
Actually, farmland and commercial real estate are interesting ideas, because they provide both an income (from the underlying commodities in the case of farmland and the commercial tenants in the case of commercial real estate) and so they hedge against inflation.
posted by dfriedman at 6:34 PM on September 25, 2010
posted by dfriedman at 6:34 PM on September 25, 2010
GARZARELLI: Well, my indicators have gone up from 67 percent to 82 percent which is quite bullish.
WTF does that mean? And they talk constantly about trading ranges. Who cares where the trading range is, you don't buy an asset because of where its been priced you buy it because of what you think its worth. If this is a good source for laymen to get advice I shudder to think what the bad sources are.
posted by JPD at 6:34 PM on September 25, 2010
WTF does that mean? And they talk constantly about trading ranges. Who cares where the trading range is, you don't buy an asset because of where its been priced you buy it because of what you think its worth. If this is a good source for laymen to get advice I shudder to think what the bad sources are.
posted by JPD at 6:34 PM on September 25, 2010
Actually, farmland and commercial real estate are interesting ideas, because they provide both an income (from the underlying commodities in the case of farmland and the commercial tenants in the case of commercial real estate) and so they hedge against inflation.
but they get shredded by deflation. Also I'd worry a lot about price especially on farmland if you look at where they are priced relative to high current profitability levels.
posted by JPD at 6:36 PM on September 25, 2010
but they get shredded by deflation. Also I'd worry a lot about price especially on farmland if you look at where they are priced relative to high current profitability levels.
posted by JPD at 6:36 PM on September 25, 2010
Hm. I think inflation is a greater concern over 50 years than deflation.
posted by dfriedman at 6:40 PM on September 25, 2010
posted by dfriedman at 6:40 PM on September 25, 2010
Something outside of the US economy, probably.
Some think Canada is a good place to invest these days.
posted by Simon Barclay at 6:41 PM on September 25, 2010
Some think Canada is a good place to invest these days.
posted by Simon Barclay at 6:41 PM on September 25, 2010
"Gold."
Yeah, I don't think buying an asset at or near its peak price is such a great idea.
posted by Jacqueline at 6:46 PM on September 25, 2010 [3 favorites]
Yeah, I don't think buying an asset at or near its peak price is such a great idea.
posted by Jacqueline at 6:46 PM on September 25, 2010 [3 favorites]
JPD: your comment just hits at the importance of being educated about the market. I can't tell you the number of people I know who have burned down rainy day funds and nest eggs on trend investments. I agree, Garzarelli is hard to follow at points. I'm not watching these types of interviews for indicators, I am watching for commentary about specific picks. Her comments on ETFs are pretty spot on.
posted by parmanparman at 7:04 PM on September 25, 2010
posted by parmanparman at 7:04 PM on September 25, 2010
20-year TIPS are yielding somewhere around 1.5% over inflation. These might be a good starting point for a chunk of the portfolio - income, an inflation hedge, and your downside's capped if deflation starts to run rampant (thanks to the "deflation floor").
posted by The Shiny Thing at 7:57 PM on September 25, 2010
posted by The Shiny Thing at 7:57 PM on September 25, 2010
And dividend stocks - the boring, sensible, blue-chip stuff - aren't a bad idea either if you want income and some capital growth as well.
posted by The Shiny Thing at 7:59 PM on September 25, 2010
posted by The Shiny Thing at 7:59 PM on September 25, 2010
I'd recommend some cash, to preserve liquidity, and cover the possibility of deflation making it worth MORE in the future.
I'd recommend some physical Gold and Silver locked in a bank vault to cover the quantitative easing as the Fed prints money to buy up all the bad debts of the banks, and the resulting heavy inflation. (Not numismatics, just Gold and Silver eagles, bars, etc)
I'd avoid bond funds as they will fall in value if the interest rates rise.
I'd keep bond purchases liquid, something that can be redeemed in a few years, to keep it liquid.
Stocks and paper based assets are probably not a good idea for a while, as the derivatives still lurk out there, and the banking system hasn't been flushed of it's bad debt yet.
Real estate is right out.
I could be completely wrong, but I strongly believe we're only at the beginning of the Very Great Depression.
posted by MikeWarot at 8:11 PM on September 25, 2010 [1 favorite]
I'd recommend some physical Gold and Silver locked in a bank vault to cover the quantitative easing as the Fed prints money to buy up all the bad debts of the banks, and the resulting heavy inflation. (Not numismatics, just Gold and Silver eagles, bars, etc)
I'd avoid bond funds as they will fall in value if the interest rates rise.
I'd keep bond purchases liquid, something that can be redeemed in a few years, to keep it liquid.
Stocks and paper based assets are probably not a good idea for a while, as the derivatives still lurk out there, and the banking system hasn't been flushed of it's bad debt yet.
Real estate is right out.
I could be completely wrong, but I strongly believe we're only at the beginning of the Very Great Depression.
posted by MikeWarot at 8:11 PM on September 25, 2010 [1 favorite]
^ MikeWarot's got the right idea.
Odds are the US over the past couple years has experienced a "dead cat bounce" thanks to "quantitative easing" (i.e. money printing). This has inflated asset values and stock prices but hasn't helped the "real" economy (see unemployment, food stamps, etc.). After the bounce, of course, comes further implosion!
That being the case gold and silver still seem like a good idea. Both are FAR below inflation-adjusted highs.
Also, the US bond market is currently in a bubble of enormous proportions.
So, where to invest? Not the US at the moment....
posted by rumbles at 12:36 AM on September 26, 2010
Odds are the US over the past couple years has experienced a "dead cat bounce" thanks to "quantitative easing" (i.e. money printing). This has inflated asset values and stock prices but hasn't helped the "real" economy (see unemployment, food stamps, etc.). After the bounce, of course, comes further implosion!
That being the case gold and silver still seem like a good idea. Both are FAR below inflation-adjusted highs.
Also, the US bond market is currently in a bubble of enormous proportions.
So, where to invest? Not the US at the moment....
posted by rumbles at 12:36 AM on September 26, 2010
Basically, split the money between an index fund and a bond fund. Early on, you want most of your money in the index fund, so it grows faster. Later, you want most of your money in the bond fund so you're not forced to sell at a bad time. A finance whiz could give you an exact breakdown of how much you want to have in each by year, based on past performance. They do this all the time for people who have just retired and have to spend their savings till they die.
Inflation and deflation won't make much of a difference as long as your stocks and bonds, and your spending, are in the same currency.
posted by miyabo at 2:47 AM on September 26, 2010
Inflation and deflation won't make much of a difference as long as your stocks and bonds, and your spending, are in the same currency.
posted by miyabo at 2:47 AM on September 26, 2010
I'd avoid bond funds as they will fall in value if the interest rates rise.
I'd keep bond purchases liquid, something that can be redeemed in a few years, to keep it liquid.
uhm you realize that if rates go up all bonds decline in value.
Fed prints money to buy up all the bad debts of the banks, and the resulting heavy inflation.
not why the fed is printing money.
posted by JPD at 6:31 AM on September 26, 2010
I'd keep bond purchases liquid, something that can be redeemed in a few years, to keep it liquid.
uhm you realize that if rates go up all bonds decline in value.
Fed prints money to buy up all the bad debts of the banks, and the resulting heavy inflation.
not why the fed is printing money.
posted by JPD at 6:31 AM on September 26, 2010
Silver is only below inflation adjusted highs because of the hunt brothers corner back in the early 80's (which btw is a great example of why investing in metals isn't investing, but rather speculating)
The same applies to gold although it wasn't just one guy in 1980. Here's a chart. basically this is as dumb a reason to buy gold as arguing "You should buy cisco because it is way below its historic high is"
Also if you bought gold at this price back in 1980 it was your worst performing investment in following 30 years - and this is only after, after, you had ten years of it being your best performing asset.
posted by JPD at 6:37 AM on September 26, 2010
The same applies to gold although it wasn't just one guy in 1980. Here's a chart. basically this is as dumb a reason to buy gold as arguing "You should buy cisco because it is way below its historic high is"
Also if you bought gold at this price back in 1980 it was your worst performing investment in following 30 years - and this is only after, after, you had ten years of it being your best performing asset.
posted by JPD at 6:37 AM on September 26, 2010
Incubate startups.
posted by megatherium at 6:47 AM on September 26, 2010
posted by megatherium at 6:47 AM on September 26, 2010
20 people will give 20 different answers to this question depending on how they feel about the future. I am bit surprised that people would answer stocks when the question is about safe and steady.
posted by smackfu at 7:21 AM on September 27, 2010
posted by smackfu at 7:21 AM on September 27, 2010
You want stocks since, due to their dividend yields, they will always beat inflation over a long enough period of time (e.g. equities inherently grow in value).
To diversify your stocks you want an indexed fund but, to be safe, you want a reasonable allocation strategy (large, mid, and small caps, domestic and international, etc.). You could do this yourself, or you could take the 80% solution and take a Target Fund (also called Lifecycle Fund). These re-allocate your investments as the target date approaches to become more conservative. For example, a 2045 fund will be mostly equities now, but as 2045 approaches it will be things like inflation-protected bonds, etc.
Ideally, you want a target fund that is indexed (rather than managed) with a low load. Vanguard 2045 is an awesome one out there for that, but pick a date that works better for your age (2045 will be when I'm 64, which is pretty much perfect).
posted by kryptonik at 7:23 AM on September 27, 2010
To diversify your stocks you want an indexed fund but, to be safe, you want a reasonable allocation strategy (large, mid, and small caps, domestic and international, etc.). You could do this yourself, or you could take the 80% solution and take a Target Fund (also called Lifecycle Fund). These re-allocate your investments as the target date approaches to become more conservative. For example, a 2045 fund will be mostly equities now, but as 2045 approaches it will be things like inflation-protected bonds, etc.
Ideally, you want a target fund that is indexed (rather than managed) with a low load. Vanguard 2045 is an awesome one out there for that, but pick a date that works better for your age (2045 will be when I'm 64, which is pretty much perfect).
posted by kryptonik at 7:23 AM on September 27, 2010
This thread is closed to new comments.
The longer answer depends upon your age, liquidity needs, debt, etc.
posted by dfriedman at 5:03 PM on September 25, 2010