Guest Column
Amy Barrett, CFP
Dangerous places to invest your money
Current economy calls for care when deciding where to park your cash
OIt’s no secret that a lot of people think the economy is a little uncertain right now. With fuel prices and the cost of living on the rise and the markets declining, there is much concern about savings and IRAs taking a big hit.
One way to preserve some of your savings is to avoid some of the current economy’s investing pitfalls. While nothing is ever a given when it comes to investing, there are a few choices you might want to reconsider before putting, or leaving, too much money in some of these dangerous places.
Minimize Large Checking, Savings Account Cash Balances
As a result of the Federal Reserve lowering short-term interest rates to historically low levels, most banks have lowered the amount of interest credited to your checking and saving accounts. Some savings accounts are paying less than one half of one percent.
What does this mean to you? If you take into account that inflation is rising more than 2 percent a year, then the real value of your checking and savings accounts is negative (0.5 percent minus 2 percent equals - 1.5 percent and this does not consider the impact of tax). As food and gas prices increase, the cash value does not grow above inflation and buys less and less each year.
What can you do to avoid this dangerous investment? Keep just enough cash in your checking account to cover monthly bills and for your short-term savings, find a higher-paying money market fund.
Look at High Quality Short- and Intermediate-Term Treasuries
Since the Federal Reserve is not likely to lower short-term rates further, the only direction is for these rates to rise. When Fed funds rates increase, short-term U.S. Treasury bonds prices generally will fall. When the prices fall, your bond investments are worth a little bit less.
For the rest of 2008, you might consider a high-quality money market fund instead of short- and intermediate-term bonds. For investors with lower income tax-brackets, many money market funds’ current yield is 2.3 percent. This investment would avoid the price drop as the Federal Reserve raises short-term rates. Investors with higher tax-brackets should consider the municipal bond version of the money market fund.
Be Cautious on Air Transport Stock Sector
According to the International Air Transport Association (IATA), the industry is expecting lower profits in 2008 due to the increase in crude oil prices. Fuel costs represent 32 percent of operating expenses according to the IATA. Since China and India are consuming increasing amounts of crude oil, oil prices may not materially drop in this year.
In addition, the air transport industry is having trouble increasing its operating efficiency as labor and maintenance costs remain high.
Our recommendation is to avoid over-weighting this stock sector and instead buy a diversified basket of equities.
Research Before Investing in Precious Metals
Contrary to common folklore, gold is not a terrific investment. In fact, during the past 82 years, spot gold prices have risen just 1.5 percent above inflation. Had you invested instead in the S&P 500 Index, the return above inflation would have been 7.1 percent.
If you are set on investing in precious metals, consider buying into mining company stocks (Sorry, Porsches and Mercedes are not precious metals!).
Historically, the many mining industry stocks have had better returns than the raw materials they drag from the earth. Do your homework before investing in a mining-oriented mutual fund or a basket of mining stocks, as these investments carry risk.
There is a certain degree of risk associated with any type of investment. Understanding how current economic conditions can affect the growth of your money can have a big impact on how much of your investment you still have when the markets recover.
If you are having doubts about what your money is doing for you, it might be a good time to consult with your trusted financial advisor.
(Some research for this article was conducted on Money-Rates.com, BankRates.com, Federal Reserve, FinanzNachrichten.de, Bloomberg.com and Onlygold.com.)
Amy Barrett is a financial professional with Savant Capital Management, with more than two decades of experience. She is a Chartered Financial Analyst, a Certified Financial Planner, and a Certified Divorce Financial Analyst. She can be reached at abarrett@savantcapital.com.
The views expressed are those of Barrett’s and do not necessarily reflect those of the Rockford Chamber of Commerce.
