Growing up I had no clue how to go about spreading out my hard earned money. I went to several networking events to look for answers. Some professionals offered no help and some would only help me if I had a certain amount of money. In the end I decided to figure it out on my own. There isn't a universal answer and what may be a good investment today may be a bad one a few years down the road.
What should you be looking for when allocating your money?
You first need to take care of your basic needs and then set aside some money for emergencies once that is taken care of you need to think where you will place your savings. Money that may be lost or money that you may not be able to touch for a while. We all differ in the way we view risk whether you are a risk taker or a bit averse you need to know our current interest rate which has stayed at 0.25% for several years now. This is why CD rates have dropped dramatically if the interest rate which banks charge each other to lend money has gone down then all interest to lenders will go down as well. When you buy a CD you are basically lending the bank money for a period of time. During 2008 rates were dropping your best bet would have been to have locked in your 2007 rates for at least a year or two. Even if you had kept them for 4 years you should have not locked in all your money as the stock market was dropping and come 2009 you should have had a good amount of money in liquid form to buy stocks at a bargain.
By 2010-11 you would have more than doubled your money had you left it in stocks. Had you bought more in 2011 you would have doubled your money once again in 2013. Had you chosen to buy a CD in 2010 you would have not made any returns. Then again you wouldn't have lost much as inflation stayed very low during the recession.
That brings us to the second indicator you should be looking out for: inflation. Inflation will destroy the value of your money in the long run. If interest rates are low you will have a hard time finding good returns. Since inflation is currently low you can settle for returns that are not as high as long as you are staying above inflation. The ideal would be to risk big and get 7% returns in a low interest rate low inflation environment but not everybody has the stomach to handle the stock market volatility. This is when you start deciding how much of your money will go to stocks. If you are young you should be putting a good amount of money into securities. I like to do my own investing and go big but it is ok if you take small steps at first.
Stocks and CDs are not always the answer back in the 1980's inflation and interest rates got out of hand real estate or gold would have been a better choice.
The 10 Yr Bond is currently at 2.8440 which is higher than the 0.25% interest rate and higher than our 1% inflation rate yet this is not where I would place my money. Ten years is a long time and at some point inflation should average higher than 2.84% and we also need to consider that when interest rates go up bond prices go down. At this point interest rates have no other way to go but up making bonds not desirable. As a financially educated investor you have to know what to look for and when to take action the signs may not always be clear but taking risk and educated guesses is the name of the game.
No comments:
Post a Comment