"If you a rob a bank, you go to jail. If you rob investors, you should go to jail. It is as simple as that. We have to stop and take a deep breath as Americans. It is always darkest before the dawn." Those wise words come from Richard Grasso, chairman of the New York Stock Exchange, (NYSE).
Corporate fraud has added to an already bleak year on Wall Street and with stocks going down more often than they go up, what are investors to do? For many, that means cutting back or dropping exposure to equities all together. Gary Thayer, Chief Economist with A.G. says, "I think they're more worried about protecting their assets than growing their assets at this point and time."
In other words: move your money out of the stock market and into the bank for cash, or cash equivalents. The advantage is you can move it quickly now and then move the money back into the stock market later, but the disadvantage is, inflation works against you and the interest rates are not very high. Checking accounts offer about 1% interest. Money market accounts have a nearly 2% rate. CDs are less liquid and the interest rates are 2.46 % for one year and 4.3% five years.
Financial Planner Rick Applegate discourages investors from settling for those low rates. He says, "Adjusted by taxes, adjusted by inflation, what do you have left over? Probably a minus! So people are going to have to become accustomed to a very different scenario than the easy money of the early 90's. It's a brand new day."
So, there's the problem. When you adjust for inflation, you lose money. So, it may be best to explore other stock and bond options. Applegate says, "There is no more safe investment than the US treasury! Safer than the bank. Safer than the money market or the CDs, if you want to start with the safest of the safe, start with the U.S. Treasury issues." Ten year treasuries are yielding 4.5% or you can invest your money in Ginne Mae Funds which are essentially pooled mortgages that pay investors interested and principal. These government agency bonds can yield 7.8% annually, but rising interest rates could drive down the share price.
"If you're in bonds, don't expect to get the historical rate of returns you get in equity markets and therefore, it may be more difficult to meet certain goals, like retirement." And that, says Financial Planner Al Gobo is the bottom line.
Sitting on cash and bonds may make you sleep better, but if you have a long term horizon plan, then it is better to ride out the stock market's roller coaster. Gobo says, "I think someone who is 40 years-old today and has a 20-25 year goal to retirement, has an opportunity to be in the stock market that if they do things properly like dollar cost average and diversify, then 10 to 15 years from now they're going to be in great shape."
Always ask an investing expert before making any drastic moves.