I was recently asked:
What is the best investment for my money during these economic times? CD’s, money markets, stocks, and a simple savings account are a thing of the past for any returns or interest on your money.
These Economic Times
The future, so we are told in the Bible, is always uncertain. In fact, one of the great mistakes of some of the people in the book of James is that they presumed upon the future (James 4:13-14). They forgot that their economic and mortal future was in the hands of God.
Every financial bear market followed a season or a time of relative (or extreme) market strength. One of the greatest investing mistakes a person can make is to forget that the stock market always carries risk. It carries risk during times of economic growth and prosperity as well as times of financial uncertainty.
These economic times simply call for us to do what we should always do – make wise investing decisions based on our own financial goals.
The Best Investment
Thus, the best investment depends completely on your risk tolerance and your investment time frame.
Important Investing Rule: The greater the returns you can expect, the greater the risk you must take.
A lot of people get into trouble with investing because they believe they can get something like a 10% guaranteed return. This violates the above investing rule.
Your investing returns will depend on the risk you are willing to take. If you are a low risk taker, you can expect minimal opportunity for losses and minimal opportunity for gains. If you are a high risk taker, you can expect a greater opportunity for gain and a greater opportunity for loss.
As such, CDs and money markets will not earn you more than a couple of percent, but you will not likely lose any money. These are low risk, low return investments. In this market, if you have money you cannot risk you could consider building a CD ladder or opening high yield savings account.
Even in this economy the stock market does have potential for gains, but also an equal potential for loss.
Typically, you should have a 5-10 year time frame for stock market investments. One way you can help regulate your returns would be to consider value averaging or dollar cost averaging.
In the stock market, there is a whole array of options from single stocks, to mutual funds, to index funds. How you invest your money in the stock market depends on your financial goals. The risk you are willing to take in exchange for greater returns.
I just recently sold most of my non-retirement funds. That was my best investment choice because I’m using the funds for another financial purpose. However, if I didn’t need to access that money, I would leave it there until I needed it. This simply illustrates that there is no such thing as a best investment across the board, For most people, the mirror is the biggest stock market indicator they need to watch.
Here’s some other investing articles to help you find your best investment:
- How to Assess Your Investment Risk
- Investing for beginners
- Basics of stock market investing
- Index Funds, Mutual Funds, & ETFs Defined
- How To Start Investing | A Step By Step Investing Guide For New Investors
- The benefits of mutual funds
- Mutual funds may be a bad way to invest
- Important Mutual Fund Tax and Capital Gains Facts Every Investor Must Know
What advice do you have for this reader? Do you believe there is a ‘best investment’ during these economic times?
Photo by pfala
{ 4 comments… read them below or add one }
I don’t agree with the idea that you can know the long-term return on a Certificate of Deposit or other safe investment class just by checking out the number on the certificate. We are living in the wake of the most extreme bull market in history. In the wake of every other extreme bull, we saw stock prices fall to one-half of fair value (that’s a drop of about 65 percent from where we are today). If you can earn a zero return while stock prices are dropping, you will have a lot more to invest in stocks when they are again available to good prices. Your real return on those CDs might be 10 percent or 15 percent per year (because you will be earning so much in stocks you buy at good prices).
I also don’t agree with the idea that investors should be seeking out risk to obtain higher returns. That’s the conventional wisdom but I see it as very dangerous conventional wisdom. There are some circumstances where risk is rewarded, there are other circumstances in which risk can destroy you. We are living in the most emotional time to invest in stocks in history (The Stock-Selling Industry has spent hundreds of millions promoting Buy-and-Hold). I don’t see this as a good time in putting more than a small percentage of your portfolio in stocks. Why not wait until stock investors sober up a bit?
Rob
The only investment that I know of that limits the risk on the downside while taking advantage of the stock market positive years is the Roth IRA on Roids. Principle is protected from losses due to market fluctuations and it is correlated 100% with the market and then you can take the money out tax free – just like a Roth IRA.
Hello Craig,
Why do you suggest a 5-10 year time frame on your investments? I am a college student just starting investing in the stock market and I expect my time frame to be closer to 30 or 40 years before I pull out my investments.
Also, you talked about options for low risk investments, but you didn’t talk about any options for high risk investments. I’d like to know your view on this.
Thanks!
@David
I should have been more clear – a minimum of 5-10 years. The longer the term the more viable on option the stock market becomes.