How to Invest with $10,000-$50,000 in the Current Market Condition
The stock market has experienced tremendous volatility in the past 3 months leaving many of us wonder what and how to invest our money in 2009. Even though most experts agree that our economy has not hit the bottom, but with stocks sitting at dramatic lows, 401K and IRA’s continue being great retirement planning vehicles, here are some advices for your 2009 investment strategies:
Safe Haven – if the possibility of losing money with your investment causes you great stress or if you’re nearing retirement age, this might be for you:
Treasury Notes (Bonds) – With fear still high on the Street and many investors losing confidence in the market, it is likely that the market has not bottomed. Sitting in on cash until we see fear receding is a safe haven bet for those who prefer to take minimal risk during recession. Yields on 10-year Treasury notes should go considerably higher and should be a safe investment.
Little Risk – if you’re open to some or little risk taking in exchange for higher return or is nearing retirement age, this might be for you:
Domestic Blue-Chip American Companies – Companies like General Electric (GE), Microsoft (MSFT), Intel (INTC), Kimberly Clark (KMB) are sitting at good value. These companies are the backbones of American economy who offer real value and products that are needed even during economy recessions. A diverse investment portfolio including a couple of those companies or buying the S&P 500 through a mutual fund or ETF are both good choices.
Semi-Aggressive – if you understand investment comes with considerable risk and is not concerned with a 20% swing in either direction, this might be more you:
Diverse Portfolio – Use traditional diversification strategy by investing in a combination of domestic and international stocks and bonds. A portfolio along the lines of 25% in S&P’s large-cap stock index, 20% in small-cap value, 25% in international, 10% in commodities, 10% in Treasury inflation-protected securities and 10% in cash is a reasonable mix of return and risk. Individuals in this category should adjust the percentage based on their level of comfort with risk.
Aggressive – if you prefer the high risk high return model or are using extra income or are not concerned with retirement at this point, this might be for you:
Small / Mid Caps – The real opportunity in a market tumble usually lies in stocks below $10 per share. Be careful to select reputable companies and avoid Pink Sheets and OTC’s. Many Pink Sheets and OTC’s will likely become penniless in 2009. ProShares Ultra Dow 30 (DDM) contains high quality choices that are worthy to be looked at.
Overall, be cautious to assuming now is the time to pour everything back into the market. Try putting your funds into the market in stages rather than all at once. 20% is a reasonable amount to test the water.
The Benefits Of Recessions
In general, recessions are painful. Unemployment surges. Assets, such as stocks, plummet. People see their retirement nest eggs evaporate in front of their eyes.
Some people try to point to the deflation associated with recessions, such as falling oil prices, as a plus. This is of course incredibly short sighted. Who cares that gas is cheaper if you don’t have a job anymore.
The benefits of a recession are long-term. It is mainly that a recession is a cleansing period that exposes and gets rid of many societal inefficiencies.
For example, let’s take our current recessions. The investment banks like Lehman Brothers and Bear Stearns have been destroyed by the credit collapse. While many people were laid off of work, those people’s labor was essentially be put towards an unproductive purpose. Those companies were taking excessive risk and leverage for unprofitable activities. It took awhile, but the deck of cards finally collapse. Now those laid off can find work in businesses where their work goes towards productive use.
In general, the white collar labor world has been filled with inefficiency. Rarely is the bus boy at a restaurant or the factory worker (unless he works for the UAW) grossly overpaid for inefficient tasks. But this has persistently been the case in the white collar world. Since white collar tasks tend to be managerial or indirectly affect a company’s bottom line, inefficiency in that realm can go undetected for quite awhile.
But with the current recession and the cost cutting that is necessary for businesses to survivive, they take a hard look at their work force and see what is going on. Companies cannot afford to pay their CEOs $20 million a year if the CEO is really not adding that much value that a replacement CEO would bring for $1 million a year. Fresh out of college kids are often not worth paying $120k a year to have them do a bunch of meaningless research.
People are cutting out spending that they did not care much about. Newspapers are being forced to go online since most people realized they don’t care about reading a physical newspaper more than the online version.
Recessions need to not let be spun out of control. We cannot allow for a deflationary spiral where perfectly good businesses are laid to waste because of short-term credit needs. Nevertheless, bubbles inevitably burst.
The good thing about government intervention is that it aims to prevent the situation from getting worse. The government will not and is physically unable to permanently prop up every inefficient business. GM’s labor woes will have to be dealt with, carmaker bailout or not. All of the government spending in the world will not save the fact that many hedge funds will have to close up shop since the world does not need tens of thousands of people investing our money for us in the market.
The tech bubble’s burst proved that you cannot just build a website and hope it will make millions eventually. Labor and capital was shifted out of the tech sphere and put towards more productive uses. Likewise, we have seen a huge bubble in credit-driven industries, which are primarily comprised of white collar labor. As these businesses get flushed out, many employees in these industries will have to find a new line of work that actually provides value to companies and society.