Where to Invest and How to Invest Your Money Now

Knowing where to invest and how to invest money has never been more difficult then it COULD be as 2013 and 2014 unfold. Making money as an investor is tough when times change, so let’s take a look at how to and where to invest money… to avoid heavy losses if the economic world takes a turn for the worse.

Before 2013, the answer to where to invest money was simple: buy stock funds and bond funds, if you are an average investor. Bond funds provided high income and relative safety, while money in stock funds was the answer to was how to invest for growth and higher returns (from early 2009 to early 2013). Then, in June of 2013, the money game got serious as interest rates threatened to rise significantly and ruin the party for everyone.

Stock funds and bond funds are still the average investor’s answer to where to invest most of their money. But if interest rates really take off, you’ll want to own the best bond funds and best stock funds. Let’s look at bonds and the bond market first.

When interest rates go up significantly, bonds and bond fund investors ALWAYS lose money. Long term bond funds get clobbered, as prices (values) take heavy hits in the bond market. Shorter-term funds are hurt much less. How to invest: look for short to intermediate-term corporate bond funds, with low expense ratios and NO sales charges (no-load). These are the best bond funds today because they pay a reasonable dividend with less interest rate risk, and they are low-cost.

Now let’s take a look at the stock market and how higher interest rates can affect stock prices and stock funds. IF rates take off across the board, stocks are likely to take a hit as well. Note: With bonds, losses WILL occur. With stocks, losses are likely (depending on how far and fast rates climb). Where to invest in stock funds: the best stock funds will be conservative EQUITY INCOME funds paying 2% or more in dividends. Once again, look for expense ratios of less 1%, with NO sales charges (no-load). This can save you 5% off the top and 1% or more a year.

Now let’s look at where to invest money if interest rates REALLY take off. In 2007 vs. early 2013: rates dropped about 4 percentage points. In early 2013 bank CDs and money markets were paying LESS than 1% vs. 4% to 5% in 2007. If rates go up 4 points from here: mortgage rates could hit 7% or more, and long-term bond funds could lose one-third or more of their value. If we go back to 1981 interest rates, mortgages went for 14%, while CDs and money markets paid 15% or more. If we revisit these rates, it will be an absolute economic nightmare, especially for bond investors.

Where to invest money in mutual funds if interest rates zoom: money market funds are the safest and best funds in this scenario. They pay virtually ZIP now, but THIS IS NOT NORMAL. In 1981 they approached 20% returns, with high safety. Before the financial crisis of 2008 they were returning 4% to 5%. When interest rates go up across the board… money market interest rates (short-term rates) go up as well.

I’ve spent the past 40 years following the markets, investing money and learning how to invest and where to invest to avoid big losses. There’s an old line that says that NOW is always the hardest time to invest money. Well, now is 2013 and 2014… and investing money could be a BEAR. Don’t get aggressive now.

Discipline Is The Key To Investing And Trading Success

Here’s what trading and investing legend, Richard Dennis, has said about making money in the markets…

“I always say you could publish rules in a newspaper and no one would follow them. The key is
consistency and discipline.”

The above quote is from the book, “Market Wizards” by Jack Schwager. Dennis is a guy who, as a trader, took a measly $400 and grew it into an estimated $200 million dollars in a matter of years — not decades — by being disciplined and following his rules. He is such a legend that several other “Market Wizards” interviewed in Schwager’s book described Dennis with the comment, “I’m not in his league.”

There are probably thousands of investment and trading systems that make money. Some make big money. But the truth of the matter is that few of the users of these systems will ever make money.

Why?

Few people have the discipline to stick with a winning system or strategy. They’ll go through an inevitable losing period and get impatient. They start tinkering with their rules or abandon them altogether.

Have you ever seen one of those mountain charts marketed by the mutual fund companies that show that if you had invested $10,000 in 1950, or whenever, your investment would have grown to $10 million or so by 2005? I’ll bet you don’t know one person who ever did that. And it’s not because it’s not true. It’s the absolute truth. It’s not hype. That’s what the investment would have done. But that’s not what the investor would have done.

The typical investor would have bailed out within a couple of years as soon as the market took a downturn or as soon as the money was needed to buy a boat or some other toy. Or the typical investor might have kept switching into whatever the “hot” investment was as any given time, always buying at the peak price.

As Dennis says, the key is consistency and discipline. So don’t spend time looking for the Holy Grail of investments or trading systems. It doesn’t exist. The Holy Grail is within you. It’s not the investment that’s going to determine success or failure. It’s the discipline of the investor.

Managing Investing and Stock Market Risks

Reduce your investing and stock market risks by:

Setting your sights on the long term, patiently riding with the ups and downs!

If you have the time to be patient, you can benefit from time diversification. The more numerous good years for stocks outweigh the bad, pulling your return up.

Thus, if you hold equities for many years, you can expect to realize significant positive growth in your wealth.

Weeding out your laggards!

Don’t be too patient with laggards. This is the management risk referred to earlier. Underperforming the market benchmarks is a big risk to which many people are oblivious.

The more years you remain with a subpar performer, the greater the damage to your nest egg. Weed out funds that have lagged their peers over the past 18 to 24 months.

Avoiding hard-core market timing!

It’s not uncommon for hard-core market timers to move between the extremes of 100% stocks during an up market to 100% cash when their indicators signal a major turning point in prices.

Market timing is especially easy to do with mutual funds. Resist the temptation. Participation in the best up months is far more important than avoiding the worst down months, and the really dramatic upward surges in stocks are unpredictable, of short duration, and few and far between. Market timers risk being in cash when the bull stampedes. Missing out can make a big difference in your long-run returns.

Being disciplined and using cost averaging!

Investing monthly in a specific stock is a great way to build wealth and cope with market ups and downs. Your fixed investments buy more shares when prices are down and fewer at higher levels.