It seems that many people have begun to see the market rally as an opportunity to get out whole, or nearly so, after the frightening losses of late March. They despaired three months ago when stock prices went off a cliff, and now that prices have regained much of the lost ground, they wonder if they should get out while the getting is good. They don’t have reason to forecast another plunge in values; they just want to avoid the pain of another March experience.
Such anxiety is understandable. March’s stock price retreat was unnerving and no one wants to go through that again. But before selling out, investors should consider two things:
- Do they have an immediate need for the money? If they do, then the recent price recovery is a wonderful opportunity for them to get out of stocks –– not because prices have risen, but because (as readers of these blogs should know well), they should not have been in stocks in the first place. Equities are only for those who have no need for the money for at least five years.
- If they do not need the money now or for the foreseeable future, they should consider the investment alternatives. There are five choices, none particularly attractive compared with stocks. Though some might offer less volatility than stocks, the cost to the investor is lower potential returns:
–Cash is one option. Cash deposits and certificates of deposit (CDs), unlike stocks, offer assurances that you will get your money back no matter when you want it. But these “cash vehicles” pay extremely low returns. Deposits — whether at commercial banks, savings banks, credit unions, or money market mutual funds — all pay less than one percent a year. CDs pay a little more, but you must tie up the money for at least a year to get that higher rate of interest –– and you will pay a penalty if you take it out early. This post will give you more detail. In all cases, the returns on deposits are less than the rate of inflation. The cost of living, in other words, is rising faster than what the investor can makes on deposits of any kind. The real buying power of what you invest in these instruments will decline, even though the dollar amounts you get back will rise.
–Quality bonds offer yields above the rate of inflation, but only slightly. That might have an appeal, but the yields are still low. What is more, the odds are good going forward that the yields will rise, which means that the bonds you buy today will lose value tomorrow. For an explanation, see this post.
–You can get a higher rate of return if you are willing to invest in the issues of companies that are less credit-worthy. But when you invest in these so-called junk bonds, you risk fluctuating prices or even the outright bankruptcy of the issuer, which makes this alternative as volatile and emotionally fraught as stocks.
–You could turn to commodities — precious metals, industrial metals, foods, etc. If the economy does well, these prices will rise, as will stock prices. But as with stocks, there is a significant downside on commodity prices should economic prospects deteriorate.
–You might take your investment funds overseas. Stocks and bonds in other developed markets — Europe, Japan, Australia, Taiwan — have all the same potentials and risks as those in the United States, so they hardly offer a haven for those wanting to flee volatility. They do have a place in a portfolio, as explained in this post but they are not a hiding place for the frightened. Emerging markets, as explained in this same post, have appealing long-term characteristics, but are actually more volatile than U.S. stocks.
If you want to be “cute” and take the risk, you might take some money out of equities and sit on it in the expectation that some future disappointment will bring a stock price retreat, and then you might redeploy that money effectively. I described this strategy here. “Cute” is the best way to describe it, because it violates the basic principle that stocks are for the long term, and no investor, no matter how clever or well informed, can time market swings.
Bitesize Investing 