Aspiring ‘investors’ tend to laugh at low-return strategies like keeping money in CD’s or paying down mortgages – and, as a long-term investing tool (now, that’s a tautology) they do suck.
But, as a short-term ‘money parking’ tool there’s nothing better … and there’s no time like the present to dust off those borin’ ol’ Ramseyesque strategies, as this article from the Tycoon Report suggests:
The most successful investors in the stock market aren’t always invested in stock. They’re only invested when the odds weigh heavily in their favor.
You must have the discipline to know when to stay out! For most people, this is one of the easiest concepts to grasp, yet the hardest to follow. This is something that comes with experience. It’s something that most people have to learn several times throughout their investment life.
People ask: “When do I know when it’s the right time to be in or out?” The answer is: If you’re asking that question, it’s time to stay out.
Otherwise, find an account or stable investment vehicle that offers you a nice interest rate. You can look at Treasuries, Certificates of Deposit, money market accounts or a bank or broker offering a relatively high-yielding interest rate.
The point is to sit in something safe while you wait for trades with a high probability of success to present themselves.
Savvy investors are willing to sit in a risk-free interest bearing account for years if need be, and you should get comfortable with taking the same stance. What’s likely tied for first place on the individual investor’s list of most common mistakes is the notion that if you’re not in the market, you’re not making money. Anxious and over-eager investors force trades at the wrong time, mainly because they’re afraid of missing the next big gain.
Fear of missing the next winner is a killer. Professional investors know that cash is a trade too.
I love that last line … that’s why I ripped it for the title to this post!
Right now, I am sitting in cash … and, I have been totally out of the market for a few weeks now even though there was a rally in between.
I am waiting for the right time – read: after the market starts climbing again (I’m happy to miss the absolute bottom) and I am sure that represents a longer-term trend OR until I find a stock that I feel won’t go much lower even if the market doesn’t rally for a while.
Same applies for real-estate, although I am actively looking for deals right now … residential isn’t my preference (I have plenty of exposure to that sector) as I am totally out of commercial right now and would like to get back in if the cash-on-cash returns improve a little (as they should as the recession takes hold, then eases a little).
Having said that I am in cash … it isn’t in your ordinary Mid-West Bank deposit account or CD … it’s legally earning 7.5% interest, hedged against the falling US dollar.
That’s why it’s often true that the rich get richer … because they have more investing options.
Still, the principle applies: sometimes, it’s OK to stay in cash or [AJC: perish the thought!] temporarily pay down a mortgage.
In the spirit of playing devils advocate I will quote Warren Buffet, “Be fearful when others are greedy and greedy when others are fearful”.
The greatest inefficiencies in the price of securities occur because of the pressures of fear and greed on human decisions, that being said it is much easier to regurgitate Warren’s quote than to put it (profitably) into practice.
Although I do commend your use of a hedged currency strategy in lieu of equity investments. I believe that less correlated investments such as hedged currency investing can provide tremendous value/opportunity to many investors and I am glad to finally hear someone in the pf blogosphere mention it.
@ Andrew – Thanks; interestingly, I am uncomfortable being so ‘uninvested’ in growth assets (stocks, real-estate) … yet, am getting fantastic (and safe) returns – given the current market – right now.
Also, Making Money 301 wealth-retention strategies can (don’t have to) be different to Making Money 201 wealth-creation strategies … I’m trying to do a little of both.
Can you provide some more insight into your hedged currency investment? I was looking at some companies to buy a few weeks ago and some of them were available on the NYSE in the form of an ADR. I entertained the idea of purchasing them from their local exchanges (Paris and London) so that they would be valued in Euros or Pounds respectively. Assuming the USD continues to fall against the Euro and GBP, I would be making gains there as well when I eventually sold the shares and converted back to USD, correct?
Thanks.
I enjoy your blog,
Chris
@ Chris – Thanks for your comment.
Unfortunately, I am not qualified to provide direct financial advice, so I tend to talk about principles rather than specifics on this blog. Any good financial advisor worth their salt should be able to get you into some of these ‘alternative investments’ if you ask nicely a.k.a. slip them a few hundred bucks 😉
However, the principle that you mention is wise … either invest directly overseas, hold currency overseas, or invest in companies that derive a lot of their income from overseas (food companies can be particularly good in a recession and in developing markets). You will be pleased to know that Warren Buffett answered a similar question in a similar vein at his 2008 AGM in Omaha … he must read this blog, also! 🙂
Chris – it doesn’t matter whether you buy a stock on a foreign exchange or as an ADR. ADRs aren’t hedged – if the stock doesn’t move but the currency does the ADR moves. The only reason for a US investor to buy on a foreign exchange is to get a stock that doesn’t have an ADR. You can also buy ETFs like EEM, EFA etc. to get broad exposure to foreign markets.
Are you specifically bearish on the dollar or just being cautious with your foreign investment? If you’re earning 7.5% hedged against a falling dollar, you’ll earn less than 7.5% if the dollar appreciates against whatever currency(ies) you’re invested in. After a few years of falling dollars, don’t you think it’ll strengthen some in the near future?
@ ButSeriously – If I knew that, I’d be the Oracle of Chicago!
PS I don’t intend to STAY in cash … 😉
AJC,
You are claiming that you can successfully time the stock market. If you can do so, I would LOVE to know your secret. I wish I was good at it but when I honestly evaluate my past timing it hasn’t been consistently good.
Here is a web page with a good counter argument especially the consequences of missing the best market days when timing:
http://www.americangeneral.com/fpc2003/opers.nsf/contents/invttype_stk-time
I assume you have been in and out of the market before? If so have you calculated the difference in returns if you had stayed invested? If you haven’t done a calculation how do you know if you really made the right choice? (Don’t forget things like transaction costs, missed dividends and getting cheap shares through dividend reinvesting!)
-Rick Francis
@ Rick – Haven’t said anything about trying to time the market … in fact, whenever I have tried I have stunk at it!
However, I never invest in a falling market … is the market still falling? I don’t know, that would be timing the market 😉