Thursday, April 14, 2011
"HELP!!!" my sister-in-law pleaded with me in an e-mail yesterday. "I have to invest my 401(k) money, and I don't know what to do with it. Can you give me some advice?"
I learned a long time ago there's no upside to giving financial advice to family members. You can't charge them for it. There's no gratitude if the advice you give works out well. After all, you're the expert and they're family. And if the advice doesn't pay off, you run the risk of getting short-changed on next year's Christmas gift.
So unless someone in my family is about to make a huge financial blunder, I'll steer the conversation over to something less polarizing – like politics or religion.
But her plea was impassioned. "I have to do something with my money," she continued. "I've been stuck in cash for the past year, earning nothing. Everything else has gone up so much I don't know what to buy. But I must buy something."
Here are some of the options she had to choose from...
* An S&P 500 index fund – up 30% in the past nine months.
* A Treasury bond fund yielding 3.2%.
* A natural resource sector fund – up 70% in the past nine months.
* An emerging markets fund – up 50% in the past nine months.
* A money market fund yielding 0.1%.
There were several other equity-oriented funds to choose from, all of which were up 20% or more over the past few quarters.
None of this is a surprise, of course. We all know asset prices have been ramping higher. It's a direct result of the Fed's quantitative easing programs. What stands out from this list, however, is there aren't any bargains left in the financial markets. Everything's expensive.
Stocks are expensive. Bonds are expensive. Gold, silver, and other precious metals are expensive. Oil, corn, wheat, and other commodities... you guessed it... expensive. Foreign currencies... expensive.
The only thing that's cheap is the only thing nobody wants to hang onto anymore: cash.
You don't make money in the financial markets by selling off cheap assets to buy expensive ones. In fact, that's a sure-fire way to lose money.
So, sensing my sister-in-law was about to make a financial blunder, I broke my own rule and offered her the following financial advice.
You can probably put your money into any combination of these investments and do just fine if you leave it alone for the next 20 years. Asset prices tend to go up over the long term. So any choice now, combined with patience, is likely to do better than the zero percent interest you're currently earning.
But I know you won't leave it alone. You'll look at your retirement account statements next month and next quarter. You'll be pleased if the balance has gone up. You'll be disappointed if the value falls. And if the value falls a lot, you'll panic. You'll want to sell out and go back to the 100% cash position you hold today.
I know this because you're human. You have emotions. You use phrases like "have to do something," "stuck in cash," and "must buy something."
Every investment choice on your list has gone up a lot. That's why you feel like you "must buy something." You're missing out and you want to get in on the action. That's normal.
Successful investing involves buying assets when they're cheap and selling them when they become expensive. It seems to me that using your cash to buy any of the funds on your list would be doing the exact opposite of what is successful.
My advice is to wait until the end of next quarter, or maybe the quarter after that. Take a look at the performance of your investment choices. If you find yourself saying, "Thank goodness I didn't buy that fund" or "I'm so happy I've been sitting in cash," that'll be the time to start putting some of your money to work.
Looking forward to seeing you at Christmas.
I offer you, dear reader, the same advice. Don't use cheap cash to buy expensive assets. The markets may indeed work a bit higher, and you may miss out on a little more of the party. But the trick to successful investing – as Warren Buffett has pointed out many times – is to be greedy when others are fearful and fearful when others are greedy.
What time do you suppose it is now?
Best regards and good trading,
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