Should I continue with my investments in stocks, or should I buy CDs?

Question

These fluctuations in the stock market are making me sick, but I feel like if I just let them sit, they will outperform the 5.5% that I could get in long term CDs. What do you think?

Answer 1

Depends on your age. I'm 61 and still heavily invested in mutual funds . . . yes the current market tightens up my gut a little, but I don't need or want to use my money for at least 6 years. I can't name a source but if you dig around a little, you'll see that stocks have averaged around 11% a year over the last 75 years. Yes, around 11% including the Great Depression years.

Answer 2

There are a couple of issues here that need addressed that you are missing.

First, you state this as an either or proposition. Either you will be in stocks or you will be in cds. There is no reason you cannot mix the two.

Second, you don't state why you would be in either other than emotional reasons. It is impossible to seek the highest performing investment, it is only possible to seek investments that will meet or accomplish certain measurable goals. It could very well be that Tanzanian real estate is the next highest performing asset class in the world. You cannot chase return, you must chase goal completion.

Third, the reason stocks were traditionally held was that their dividend tends to keep up with or outpace inflation. That means stocks guarantee your income, even though the principal is insecure. The reason to hold debt is to secure your principal even though the income stream is insecure. A holder of a 1982 CD earning 14% became a 1993 holder of a 3% CD. That is more than a 75% income drop even though the principal was perfectly safe.

Finally, it depends upon what stocks you hold. You really need to understand what stocks are in your portfolio. You need to buy stocks at low price relative to the present value of their future income or cash flows. If a stock is reasonably worth $100 per share, never pay more than $70 for it for your given minimum acceptable rate of return. If that stock is selling for $120 ignore it even if it is the best stock on Earth, likewise if it is selling for $60 then allocate around 4% of what you own to it.

I would suggest you start reading "The Intelligent Investor," by Benjamin Graham. Whether you realize it or not you are a speculator not an investor. You need to change your attitude toward return and become an investor. Otherwise, you are going to get eviscerated in the markets someday chasing return. It is people like me who make outsized returns from people like you. I am out there and I am after not only my share of the pie, but part of your share.

Read and educate yourself.

Just a note, if you are a mutual fund investor, go to Morningstar.com's website. They do a wonderful analysis of funds. Just ignore their star ratings. Look for mutual funds with weighted average PE of less than 15, avoid sector funds and look for funds with below average costs. Ideally, also look for funds that have managers with very long tenures 10 years is great and good returns over those time periods.

Answer 3

Perhaps you should be using a professional money manager. Stocks can be very risky and volatile, but as a group offer the best hedge against inflation.

CDs offer safety of principle but inflation is rising and they may well lose purchasing power, especially over the long run.

Typically a porfolio is built with time frame in mind. What is this money for and when will you need it? Money for retirement 20 years from now is ill-placed in a CD, but money you want to buy a house in 3 years may well be BEST served in the CD.

Most portfolios are built with a mix of safety and risk to optimize returns at an appropriate level of risk for the time frame you expect to be invested.

There is no one right answer except the one that suits YOUR purposes.

As to stocks, owning just a few is a huge risk as your success or failure relies on just a few companies. That's where a mutual fund or money manager can help by carefully selecting stocks both for potential and with some diversity of industry so they don't all tank at once.

Mutual funds are great for any investor, even small ones. Money managers are rarely open to those with less than $100K of investable assets.

So...you need to sit down with an investment advisor who will direct the best place for your money and help you understand why he or she recommends what they do.

Any answer given without completely understanding your situation is worthless and potentially dangerous.

Answer 4

If it is taxable money, you will get taxed if you put it in a CD. If you want to protect the money from loss but have some gains an annuity and/or some universal life insurance might be helpful. You should seek the advice of a financial adviser. Many products can defer the taxation until use. Depending on the source, and where you invest the money you might not have to pay tax on it at all. good luck. Also if you want to stay in the market there are different types of annuities and other insurance that invest in the market.

Answer 5

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Answer 6

Sure it can be scary but.........

Fact: Equites will outperform over time. (provided you have reasonable equities selected, of course) S&P average return over the last 50 years is somewhere in the 9 - 10% range.

Remember Warren Buffet's adage:

In the short term the market is a voting machine, in the long term it is a weighing machine.

Peter Lynch (Magellan Fund )

I can't tell you the direction of the next 1,000 points......but I can tell you the direction of the next 10,000..and that is up :)

This obviously depends on your investment horizon. but if you have a long term view, you will get higher returns from equities.

A great source of information is Dr. Jeremy Siegel's "The future for investors". He is week-end columnist here on Yahoo and Professor of Finance at Wharton . I highly recommend it . A read of this will give you insight and confidence to "stay the course".


best

Paul Gallagher

Answer 7

In the short term there's always the pain of volotility with stocks that you won't find with fixed income investments. But, the history of the stock market shows that you can't improve on the return of stocks by parking money in fixed investments.

That said there is a happy medium. Mutual funds. Choosing Individual stocks can be like gambling. Choose a no-load (no up front fees) mutual fund allows you to have the fund manager worry about buying and selling individual stocks to maximize your return.

Mutual funds come in all types: growth, income, bonds, real estate funds, international funds...

Go to http://www.smartmoney.com/oneasset/

Use the asset allocation tool to find out what mix of funds best suits you.

Good luck.

Answer 8

If long term, go with stocks and stop watching it so you won't get sick. CD rates are going up all the time now so I wouldn't want to lock it in at 5.5. I'm in a liquid savings account and it's over 5% so that 5.5 doesn't look that good to me.

Answer 9

I say keep investing in the stock market. HoweverI wouldn't hand over my money to a mutual fund company b/c, personally, I feel that mutual funds, although they represent safety for most of the population, are more like gambling than choosing stocks yourself. I'd rather know exactly what's going on with my money.

I wouldn't invest too much of my money in CDs, either, b/c that's a measly 5.5% return, like you said, and currencies tend to devaluate more easily than other things.

Answer 10

Yes keep invested in the stock markets. Long term equities have outperformed fixed income. You need to have a short term and longer term investment objective and stick with it.
Above all DON'T PANIC.