Opportunity (Still) Knocks By Jane Bryant Quinn
Opportunity (Still) Knocks by JANE BRYANT QUINN
In volatile markets, the extremes—'sell,' or 'stay put'—are bad answers for long-term investors. Think about adjustments instead.
By Jane Bryant Quinn
© 2006 Newsweek, Inc.
June 19, 2006 issue - Investors looked into the belly of the beast last week. The Federal Reserve made it pretty clear that it would raise short-term interest rates—again—at the end of this month. Almost every type of investment you own howled at your heels, reacting to fears of slower growth. Most economists think that business faces a soft patch (not a recession) this summer and fall.
But because we can't know, the market riot probably isn't over yet. So what are you going to do about it? The extremes—either "sell" or "stay put"—are both bad answers for longer-term investors. Instead, look at where you're keeping your money and think about possible changes as prices fall. Here's what the playing field looks like now:
Cash. Money-market funds averaged 4.4 percent last week, and will pay more (safely) when the Fed raises rates again. That's more than you get from most six-month CDs. "Before you invest, look at taxes," says planner Bill Cleveland of Preston & Cleveland Wealth Management in Augusta, Ga. In the 33 percent bracket or lower, you earn more from a taxable money fund than one that's tax-exempt.
U.S. stocks. In just the past month, the Dow slid 6.4 percent, the S&P 5.5 percent and the NASDAQ 9 percent—reminding us all that stocks alternate between months of tedium and days of sudden, major ups and downs. It's not unusual for stocks to "correct" by 10 to 15 percent after a long bull run and then start up again. Economist Mark Zandi of Moody's Economy.com sees six bad months ahead, but adds that stocks are still the place to be over several years. The market will rebound earlier if business softens enough for the Fed to decide to hold off on rate increases after June. So keep making regular investments in your retirement plan. You're buying at lower prices, which will serve you well when stocks rise again.
International stocks. They've dazzled for the past five years. Since the start of 2001, U.S. stock mutual funds averaged 2.6 percent a year while internationals rose 8.5 percent, according to Morningstar, which tracks fund data. They've joined the general rout this month, but as you redo your investments they belong near the top of your list. Europe's economy is expanding, Asia's is sizzling and countries that export oil and metals are raking in the chips. "The shifting sands of the global economy aren't moving our way, they're moving Asia's way," says chief global economist Allen Sinai of Decision Economics. "You don't want to be only in dollar investments anymore." Besides, the dollar will weaken when the Fed stops raising interest rates, he says. When the dollar declines, internationals do even better for American investors. In these bad markets, however, consider investing monthly rather than buying all at once.
Commodities. What a run for resources such as oils, metals and construction materials! The Commodity Research Bureau (CRB) index has doubled since January 2002, thanks to surging demand from China, India and other developing countries. Recently prices slid, but the high-demand story still has years to run, says CRB chief economist Richard Asplund. Energy mutual funds are hot. But for tracking commodities as a whole, consider exchange-traded funds (ETFs)—stocks you buy through your brokerage account. Possibilities include iShares Goldman Sachs Natural Resources, Vanguard Materials VIPERs and Energy VIPERs, and the new DB Commodity Index Tracking Fund.
Gold. In little more than four years, gold jumped from $260 an ounce to $730 before calming down a bit last week. It's a hedge against dollar weakness and a bet on continuing, huge demand in Asian countries, especially India. Sinai almost blushes over the phone as he confesses to being a gold bug today. He sees prices sliding back to the $600 range, then rising again, perhaps to new highs. If you're feeling buggy, too, look again at ETFs—StreetTracks Gold or iShares Comex Gold Trust.
Homes. Median prices probably peaked last October, says Lakshman Achuthan, managing director of the Economic Cycle Research Institute. Since then they've declined about 4 percent, with, he says, further drops ahead. You might be in trouble if you gambled on an "option ARM" loan that lets you pay less than the interest owed. Unpaid interest builds up as additional debt. Keith Gumbinger of HSH.com analyzed a $200,000 option ARM taken out in December 2003. After 29 payments of $800 a month, this loan would have grown to $210,256 today. To start repaying in full, you'd have to do $1,400 a month. Moral: stick with regular ARMs and fixed-rate loans.
Bonds. When interest rates rise, bond prices drop. So where you stand on new bond investments depends on where you think rates will go. Achuthan expects just a small increase and then a decline, based on his expectation that inflation will ease soon. That makes today's bonds, at 5 percent, "very, very appealing," he says. Zandi and Sinai, by contrast, think rates will rise a lot higher and advise you to wait. Your call.
Whatever you decide, at least take a fresh look at what you're doing. Bad markets are painful, but an opportunity, too.
Reporter Associate: Temma Ehrenfeld
In volatile markets, the extremes—'sell,' or 'stay put'—are bad answers for long-term investors. Think about adjustments instead.
By Jane Bryant Quinn
© 2006 Newsweek, Inc.
June 19, 2006 issue - Investors looked into the belly of the beast last week. The Federal Reserve made it pretty clear that it would raise short-term interest rates—again—at the end of this month. Almost every type of investment you own howled at your heels, reacting to fears of slower growth. Most economists think that business faces a soft patch (not a recession) this summer and fall.
But because we can't know, the market riot probably isn't over yet. So what are you going to do about it? The extremes—either "sell" or "stay put"—are both bad answers for longer-term investors. Instead, look at where you're keeping your money and think about possible changes as prices fall. Here's what the playing field looks like now:
Cash. Money-market funds averaged 4.4 percent last week, and will pay more (safely) when the Fed raises rates again. That's more than you get from most six-month CDs. "Before you invest, look at taxes," says planner Bill Cleveland of Preston & Cleveland Wealth Management in Augusta, Ga. In the 33 percent bracket or lower, you earn more from a taxable money fund than one that's tax-exempt.
U.S. stocks. In just the past month, the Dow slid 6.4 percent, the S&P 5.5 percent and the NASDAQ 9 percent—reminding us all that stocks alternate between months of tedium and days of sudden, major ups and downs. It's not unusual for stocks to "correct" by 10 to 15 percent after a long bull run and then start up again. Economist Mark Zandi of Moody's Economy.com sees six bad months ahead, but adds that stocks are still the place to be over several years. The market will rebound earlier if business softens enough for the Fed to decide to hold off on rate increases after June. So keep making regular investments in your retirement plan. You're buying at lower prices, which will serve you well when stocks rise again.
International stocks. They've dazzled for the past five years. Since the start of 2001, U.S. stock mutual funds averaged 2.6 percent a year while internationals rose 8.5 percent, according to Morningstar, which tracks fund data. They've joined the general rout this month, but as you redo your investments they belong near the top of your list. Europe's economy is expanding, Asia's is sizzling and countries that export oil and metals are raking in the chips. "The shifting sands of the global economy aren't moving our way, they're moving Asia's way," says chief global economist Allen Sinai of Decision Economics. "You don't want to be only in dollar investments anymore." Besides, the dollar will weaken when the Fed stops raising interest rates, he says. When the dollar declines, internationals do even better for American investors. In these bad markets, however, consider investing monthly rather than buying all at once.
Commodities. What a run for resources such as oils, metals and construction materials! The Commodity Research Bureau (CRB) index has doubled since January 2002, thanks to surging demand from China, India and other developing countries. Recently prices slid, but the high-demand story still has years to run, says CRB chief economist Richard Asplund. Energy mutual funds are hot. But for tracking commodities as a whole, consider exchange-traded funds (ETFs)—stocks you buy through your brokerage account. Possibilities include iShares Goldman Sachs Natural Resources, Vanguard Materials VIPERs and Energy VIPERs, and the new DB Commodity Index Tracking Fund.
Gold. In little more than four years, gold jumped from $260 an ounce to $730 before calming down a bit last week. It's a hedge against dollar weakness and a bet on continuing, huge demand in Asian countries, especially India. Sinai almost blushes over the phone as he confesses to being a gold bug today. He sees prices sliding back to the $600 range, then rising again, perhaps to new highs. If you're feeling buggy, too, look again at ETFs—StreetTracks Gold or iShares Comex Gold Trust.
Homes. Median prices probably peaked last October, says Lakshman Achuthan, managing director of the Economic Cycle Research Institute. Since then they've declined about 4 percent, with, he says, further drops ahead. You might be in trouble if you gambled on an "option ARM" loan that lets you pay less than the interest owed. Unpaid interest builds up as additional debt. Keith Gumbinger of HSH.com analyzed a $200,000 option ARM taken out in December 2003. After 29 payments of $800 a month, this loan would have grown to $210,256 today. To start repaying in full, you'd have to do $1,400 a month. Moral: stick with regular ARMs and fixed-rate loans.
Bonds. When interest rates rise, bond prices drop. So where you stand on new bond investments depends on where you think rates will go. Achuthan expects just a small increase and then a decline, based on his expectation that inflation will ease soon. That makes today's bonds, at 5 percent, "very, very appealing," he says. Zandi and Sinai, by contrast, think rates will rise a lot higher and advise you to wait. Your call.
Whatever you decide, at least take a fresh look at what you're doing. Bad markets are painful, but an opportunity, too.
Reporter Associate: Temma Ehrenfeld
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