Question regarding long term investments?

Question

I'm looking at investing about 10G, split between a traditional IRA with the larger portion going to US/foreign stocks; probably about a 40/60 split. I'm self employed now, and will open a Roth IRA from my earnings at a later date.

For a long term investment strategy, I seldom hear recommendations for money markets, even though several people have told me that over the "long term" money markets have a return rate of around 12%. I realize this is a very general question, and of coarse it depends on which stocks are purchased, and how the money market fund managers are investing your money

Q: Given that my financial adviser is recommending stocks with growth potential or stocks with a good track record, do stocks historically, post a better return rate than money markets? (Historically defined as the last 10-15 years)

Thanks!

Chris

Answer 1

Historically over time, stocks have outperformed money market/bank accounts. I think you are confusing money market with mutual fund accounts though. Money market accounts are bank accounts, and no way do they pay 12% rate of return. Mutual funds might pay a rate of return of 12%, and those are run by money managers would pursue various strategies to achieve those returns.

Answer 2

I understand that you don't trust the stock market, however do keep in mind that CDs are not necessarily safe either. It is true that CDs maintain a steady dollar value, however the low interest rates generally do not keep up with inflation over the long term. This inflation is largely due to the government's steady money printing and debt spending year after year. This means that while you may have slightly more money 20 years from now if you invest in a CD, that money will not buy you nearly as much stuff in the future as it will today. Despite the frequent stock market crashes (which occur about every 7 years on average) the stock market has still outperformed CDs over any 25 year or longer time period in history. This includes the 25 year time period starting just before the great stock market crash of 1929 and ending in 1954. There are economic reasons for why this has been the case, but I won't go into details. Either way don't take my advice - if you have $250,000 to invest I would get some opinions from a few financial advisors. They can help determine what is best for your situation and can explain in details the pros and cons of every option.

Answer 3

I believe that money market accounts have a better rate of return WHEN they make money. I just have a problem investing anything in something that has a potential to lose money over the long haul, whether it's the stock market or money market.

I'd look into municipal bonds, before making my decision. Most treasury bills and municipal bonds mature tax-free, and if they're purchased with after-tax money... hey, even better.

The one thing that a ton of people overlook is the fact that with traditional IRAs, they will be pulling out their money at a time in their lives when their income will be a fraction of what it's been before retirement. This means that they will be in a less favorable position to pay the taxes on this income, when they need those dollars the most for expenses. See, when a person takes the distributions from their traditional IRA, it is very likely that this income will cause a portion (usually around 85%) of their Social Security income to become taxable to them, as well. And that becomes a very big chunk of money to a person who is on a fixed income.

You'll want to take some time and think it all through. You may even want to take a look at regular CDs at credit unions. A lot of the time, you can find rates as good or better than IRA rates without locking in your investment funds for such a long period of time. That may factor in, if you're doing self-employment because you may end up needing some of that money for unexpected expenses. I call that the "Oops" factor. ;)

Answer 4

I'm an investor and frequently dabble in the stockmarket. Trading currencies in money markets could give you a 12% return. Money markets for trading currencies are completely different from a money market savings account, which will never give you more than a 7% return, even if you are lucky.

As far as an investment strategy goes, you have to determine your own. Determine how much risk you can take and how much time you want to devote to an investment vehicle. Afterwards, together with your advisor or financial planner, set up your investment plan, which includes as investment strategy.

In stocks, you can make as much money as you like, as long as you put in the time and effort, are willing to learn. Some people even make upwards of 80% plus returns, some even above 200% returns. Those who do not take the time to learn and know what they are doing, consistently lose money in the stockmarket, some even lose all their capital and more...

Answer 5

I have yet to see Money Market funds pay anywhere close to 12%. Usually they are composed of very short term secure investments like T-Bills, muni bonds, etc.

For long term investments where you want significant growth, you need to invest heavily in stocks, in a wide variety of sectors, including foreign stocks.

I think 60% foreign stocks and 40% US is a very risky mix, but it could pay off big time.

Since you are self-employed, look beyond IRAs for retirement investing. Look at SEPs, as they allow you to sock away a lot more money than IRAs.

Answer 6

Chris,

Stocks over a 10-15 year period are highly likely to outperform money markets. I don't believe you would achieve a 12% rate of return in any money market accounts, even if it is very long-term. Stocks increase your risk exposure, but with higher risks comes higher rewards. Be careful that you don't get all high risk stocks, get some value stocks that are low priced and have good dividends.

Answer 7

Money market accounts give you short term interest and low rates. It's OK to park money there temporarily but not as an investment. Your financial advisor is giving you good advice about putting your long term money in growth stocks. Buy them and unless a particular company goes sour, let them set.

Answer 8

Mutual fund wil be best for long term investment.. It is my experience....http://minurls.com/200