It’s getting to be time to rebalance the finances. Much of my thinking of the current state of the economy and the stock market echoes what you see in John Mauldin’s excellent Bull’s Eye Investing. (Do be sure to check out John’s free newsletter, as he dispenses useful and timely thoughts every week). The short of it:
Stocks are richly priced and are not going to provide decent returns for the next few years. Don’t believe me? Take a look at how good the returns for the major indexes have been over the past 5 years. (Hint: it’s close to zero.) For the full story on this, read Mauldin’s book. He goes into almost excruciating detail.
There are still stocks out there that are good values. The Motley Fool does a decent job finding them.
The trade deficit, though it declined in the most recent month, is huge. Couple this with a government that’s borrowing money like a teenager with their first credit card, and you’ve got a recipe for a falling dollar. Already, the dollar has taken a huge tumble against other currencies. I wish I had acted on this sooner, but it wouldn’t seem that the dollar is done falling yet. As Mauldin has mentioned in recent newsletters, Asian governments are buying up dollars to hold up their business in exports to the US. If they stop, the dollar will plunge. If you don’t believe me that the trade deficit and the budget deficit are a problem, listen to Mauldin or Warren Buffett and Charles Munger. Those guys know what they’re talking about.
Interest rates are on the rise.
This is some scary stuff. So, I’m going to look into some good sources for safe returns. I’ll also mention one that’s a bit less safe, but interesting nonetheless.
I’m not a lawyer, financial planner, CPA, gardener, bartender or anyone else qualified to give professional financial advice. You’ll have to figure out for yourself what you want to do with your money, but I’ve got some good links here to share.
First stop, Bankrate.com, where you can get a quick snapshot of interest rates. They’re listing five banks offering 3.9-4.0% APY on a 1 year CD. That’s a big boost over the rates of a year ago. 6 month CDs can be found with 3.5-3.68% APY.
Want something more liquid than that? How about an Emigrant Direct “American Dream” Savings Account? 3.25% APY, and it’s “linked” to your existing checking account. This is an FDIC-insured bank account from a real bank with $10 billion in assets.
With inflation on the rise, Series I Bonds are a good deal. In fact, these have had some of the best returns for completely safe investments. Currently, they are paying 4.8% (1.2% fixed + the inflation rate). You have to hold the bond for a year, and you pay 3 months interest as a penalty if you cash it in before five years is up. When CDs were paying 1.5%, these guys were paying 2.2%.
These rates of return may not sound all that great. But, if the stock market has another five years like the previous five, you’ll be better off putting your money into one of these guaranteed investments. Of course, I don’t advocate putting all of one’s money in “safe” investments, but that’s what I happened to be looking at right now and figured I’d pass along what I find.
Now we come to the promised “less safe” option. Actually, if you believe that the dollar is going to fall, this is more safe. You see, earning 3.25% in a money market is great. But, if the dollar is falling against other currencies, we’ll likely see inflation increasing and our buying power drop. This is what makes EverBank interesting.
EverBank offers FDIC insured accounts like other banks, so you don’t need to worry about that aspect. On the surface, their site lists a 2.76% APY money market. At 0.5% less than Emigrant, that’s not interesting. Take a look on the right hand side of the page, and you’ll notice “World Currency” rates. That’s what makes EverBank interesting.
These folks let you open up savings accounts and CDs in other currencies. Let’s say you think the dollar is going to fall against the euro. You could open an account with a European bank, and then deal with all of the extra paperwork that holders of foreign accounts have to deal with. Or, you could just open an account with EverBank, a US bank that makes it easy to deal in foreign currencies.
When you look at EverBank’s rates, keep in mind that shifts in foreign exchange rates alter what the net rate is to you. If the dollar drops 15% against the euro, and you’ve got your account in euros, you’ve just made 15%! That’s why it’s a bit riskier a proposition: you’re gambling on foreign exchange rates. When you invest in one of the other places I described above, at least you know your principal is safe and that you’re getting a guaranteed rate.
For stock tips, you should probably go to the Fool. You could also pay attention to the investment spam messages that show up, but I wouldn’t recommend it. Then again, it doesn’t matter what I’d recommend, because I’m not a professional 😉