Once you have an adequate cash reserve to cover financial emergencies it’s a good time to invest money for retirement and other financial goals. Then it becomes a question of how and where to invest. For example, will 2014 and 2015 be a good time to invest money in stocks or would bonds be a better choice going forward?
Some finance professionals will tell you that it’s always a good time to invest money, especially if they are trying to sell you a financial product like mutual funds. That’s a true statement – in the sense that you need to put your money to work. The issue here is really where to invest and how to allocate your money to make the best of it. Let’s take a look at the average investor’s basic choices: stocks, bonds, and safe interest-paying financial products.
For most people mutual funds are the vehicle of choice for both stocks and bonds because they offer instant diversification and professional money management. There are also safe funds called money market funds that millions of investors use as a cash reserve. Let’s look at all three asset classes (choices) in terms of when is a good time to invest money. I write this in 2014 with an eye to the future.
A really good time to invest money in stocks is when the economy is working its way out of a recession. That’s when stocks are cheap and smart investors are looking forward to better times ahead. They bid prices up in anticipation of higher future prices (a bull market). Most average investors are selling their stocks and stock funds at such times. For example, this past bull market started in early 2009. Average investors were still selling stock funds, on balance, four years later. By 2014 they became net buyers when the bull market was almost five years old.
Looking at where to invest in 2014, 2015 and beyond: this might not be a good time to invest money in stocks. The party could be coming to an end, if history repeats itself. Investors have become complacent and many have jumped on the stock bandwagon simply because stocks have been the best performing area for five years running. No trend lasts forever, and stocks are not cheap anymore. Any drastic economic, political, or financial news could spark a sell-off and lead to the next bear (down) market.
A really good time to invest money in bonds is when interest rates are high and falling. The best time to buy bonds was more than 30 years ago when rates hit historical highs and basically continued to fall for more than 30 years. Bonds were paying high interest income AND bond prices were going UP. Going into 2014 interest rates were near historical lows. Bond interest income is now low by historical standards, and any significant increase in interest rates will send bond prices (values) DOWN. That’s the way bonds work. They pay a FIXED interest income because the interest rate they pay is fixed for the life of the bond.
Higher interest rates make existing bonds less attractive, so bond prices will fall to adjust for the lower interest income vs. new bonds being issued. This price adjustment is made in the bond market which works just like the stock market or any other financial market. So, in terms of where to invest, if interest rates seriously head upward in 2014 or 2015 it will NOT be a good time to invest money in bonds.
With interest rates at or near historical lows in recent years, safe financial products like savings accounts, CDs and money market funds don’t look attractive and haven’t for several years. The question is: how long can these ridiculously low rates continue? How long will the federal government support these low rates in an attempt to stimulate the economy? If you knew this, you would know where to invest and whether or not it was a good time to invest money in stocks, bonds, or in safe financial products. Higher rates are not good for stocks and bonds. Significantly higher rates in 2014, 2015 and going forward will definitely CRUSH bonds and likely stocks as well.
WHEN interest rates start to take off it’s a good time to invest money in safe, liquid short-term financial products like savings accounts, short-term CDs and money market funds. Keep yourself diversified across the three asset classes, but keep some extra cash safely tucked away awaiting future opportunity. And remember that the issue here is where to invest and when. Somewhere down the road there will again be a good time to invest money (more money) in stocks and bonds. That will be when prices look cheap and most investors are running scared and selling.