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.