Let's be honest: the economy is in trouble. Big name companies are losing money faster than the government can print it. Old American mainstays are threatening bankruptcy. With all of this doom and gloom, many people have given up on stocks and the mutual funds that buy them. The reality is that stocks have lost about 40% of their value over the past year and 20% of their value in the past five years. Long gone is the crazy stock market where any business with a dot-com in its name saw its value skyrocket. People are actually losing money.
So, if you have given up on stocks and mutual funds, where can you park your retirement and savings money?
Options
There are a number of options available for those tired of the stock market, as well as those closer to retirement. Some are safer than others are; some offer slightly higher returns. However, none of them will help you get wealthy in this lifetime. They are all methods for preserving what you have already saved, not growing it in any appreciable manner.
First, you can try what are called income funds or bond funds. These are still mutual funds, but their primary focus is trying to avoid dramatic losses. They buy a lot of very safe investments, including government bonds (Federal, state and local) and bonds from top-rated corporations. The managers of the funds work carefully to help balance the values of the investments so that there are not major swings in the net asset value (NAV), which is to say the price of the mutual fund shares.
The sacrifice you make is on return. According to Morningstar.com (a great online research tool, www.morningstar.com), one of the top-performing bond funds for the past three years earned a total of about 11%, or roughly 3.5% per year. That's pretty reasonable, given that the current 30-year Treasury bond pays less than 4% interest. If that is the normal return rate for the future, it would take about 20 years to double your money. Is that better than losing money? Sure. But it isn't nearly as helpful as doubling your money every 10-12 years, as the stock market historically has done.
Option 2
Option two takes you to the banks and out of mutual funds completely. At the bank, you have several investment options. There will be a number of variations, but the general categories are the same. You have standard bank accounts, money market accounts and certificates of deposit (CDs). (In fairness to the banks, you can also set up 401K, IRA and other retirement accounts at banks. These accounts are similar to the type you can get at work - and just like at work, they will invest mostly in mutual funds. What we're talking about here is the accounts that you can get only at banks.)
Standard bank accounts, such as savings and checking, offer easy access to your money. The money is also guaranteed by the US Government (through the FDIC). Money market accounts make short-term investments in safe bonds to return a little higher yield. Certificates of deposit are fixed-term investments, where you give the bank a set amount of money for a fixed period of time. In return, the bank pays you a higher interest rate.
All of these accounts are guaranteed in a federally insured bank. The guarantee was $100,000 per bank per person, but the government temporarily raised this to $250,000 per bank per person last year. That guarantee means that even if the bank goes under, the deposits will be paid in full. So what do you sacrifice? Earnings. A normal savings account now pays about 0.10% interest. Yes, 1/10th of a percent. That is basically the same as giving your money to the bank at no charge; they just keep it safe for you. A money market will usually have a higher minimum balance, but it will pay slightly more. Money markets are paying rates between one-half and one percent. CDs pay a higher rate for a longer commitment; but in this environment, even this doesn't help. Five-year CDs pay less than 2% interest.
Why the emphasis on the return? Because it is the yield, or percent return, that determines how fast your retirement savings grow. A 2% yield takes 36 years to double your money. At these low rates, chances are you would retire from a full career before you even doubled your investment. An 8% yield, such as the stock market historically returns, doubles your money every 9 years. That means you could have 16 times your original investment in the same 36 years. Double your investment or 16 times your investment - there's a big difference on how many margaritas you enjoy on the beach at retirement!
The Non-Option
In uncertain economic times, the number of advertisements for precious metals (normally, gold or silver) seems to multiply like cockroaches. The ads promise safety, emphasize preservation of value and hint at a great investment. So, we'll spend a few moments on gold (and the same issues hold with silver and other metals).
Gold is recognized as a very valuable and desirable metal; refined, pure gold is stunningly beautiful and costs a pretty penny at the moment. At $900 an ounce, we’ll take 100, right? But let me be clear: gold, as an investment, stinks.
The historic return on gold is 0%. Yes, ZERO percent. Gold is not an investment; it is what the business folks call a speculative investment. Speculative investment is a nice way of saying gamble. The value of gold is not determined by any predictable factors. The amount of gold, the location of gold does not change the value of gold. The price is determined solely by the whims of the market place. If you buy gold, you are just gambling with that money. And just like with gambling, you can win a fortune. For example, if you bought gold in September 2001, you paid about $280 an ounce. You could have sold it in September 2008 for about $830 an ounce. That's a profit of $550 an ounce, or a return of about 17% per year for 7 years. Outstanding!
Of course, every gambling win is balanced with a gambling loss. In September 1980, gold cost about $673 an ounce (in 1980 value dollars). Seven years later, gold was worth $460 an ounce. That's a negative return of about 6% per year, not including the losses due to high inflation. And if you held that September 1980 gold until August 2007 (almost 27 full years), you could have sold it for $6 an ounce less than you paid. Tie inflation into the mix, and you lost big time.
I'm not saying gold cannot be part of your investment structure. There is a place for gold (or silver) in certain portfolios. But, I firmly believe that gold is not a place to hide money for safety; it is a place to gamble with a little extra. You need to know that if you put money into gold, it is just like placing money on the craps table in Vegas. You could win and you could win big. But you could also lose.
Conclusion
While no investment option equals the stock market for long-term growth potential, the reality is that many people are scared of the market now; and understandably so. Bond funds can be a middle-of-the-road safe haven for retirement savings, promising a little growth and more price stability. Federally insured banks are some of the safest places to park your money, but that safety comes at a hefty cost in interest rates. For those with a low risk tolerance or an impending retirement, that still may be the best option.
Do not get tricked into buying gold or silver as a way to avoid market swings. You do avoid the stock market swings, but not the metal price swings. Precious metals are an investment gamble, not a safety net, no matter how enticing the advertisement may be.
Remember, it's your money. You should understand where it is, why it is making money and how it will grow in the future. If you don't understand why your investment is making money, or if it sounds too good to be true, then move your money elsewhere.
Be safe.
Jonathan Bastian
Jonathan Bastian is a police officer in Lexington, Kentucky. He is a noted author on thermal imaging technology, but has a passion for personal finance and helping people spend money wisely. He has a bachelor's degree in business economics and international relations (commerce emphasis), and paid for several Spring Break trips by "buying low and selling high." He is still a cop by trade, so his suggestions and comments are not intended as formal tax, financial or accounting advice. Consult paid professionals if you need formal guidance.
