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How To Invest Your Retirement Savings Now

This post is inspired by the item a couple of posts farther down about how bad the European stock markets are this morning. By the time you read this, you’ll know how bad the U.S. stock market is today.

People who follow my commentaries on Horsesass.org know that I periodically post investing-related comments on that blog. I don’t have to live on investment income, therefore I enjoy investing my excess income as a hobby. I learnt how to invest 100k online and it was really helpful. (The reason I have excess income is because I have no debts. You should do that, too: Pay off the house, pay off your cars, pay off your credit cards, while you’re still working and still can. Believe me, you’ll be glad you did.) For me, it’s a game. For some The-Ave.US readers, no doubt, managing your retirement savings will be a matter of eating or not eating after you’re no longer able to work.

Being a humanitarian, I’d like to share what I’ve learned — free. These are, of course, my personal opinions — nothing more or less. What you do with them is your business. I’m not responsible for your decisions.

I don’t like 401(k)s (unless the employer matches your contributions) or mutual funds. The problem with 401(k)s is they force you to invest in mutual funds, which are lousy investments. Something like 80% of all mutual funds underperform the market indexes. Put another way, that means a monkey throwing darts at a list of stocks would do significantly better than most so-called “prfoessional money managers.”

Most, if not all, professional money managers are very bright and highly educated people. So why do they perform so poorly? Because they make investment decisions for lots of reasons, almost none of which have to do with making money for you. For example, when investors are panicking and pulling their money out of stock mutual funds and putting it into bonds and Treasures, where they feel safer, the people who manage the mutual funds are forced to sell stocks to raise cash to meet the withdrawals. They know they shouldn’t sell those stocks at those prices as sites like Stocktrades.ca tell them not to do so, but the behavior of their customers forces them to, so they do.

Speaking of Treasuries and bonds, they’re anything but safe. In fact, they’re among the most dangerous investments on earth right now. Bond prices always move in the opposite direction of interest rates. The government, not the market, sets interest rates. This is dignified by the appellation “monetary policy.” Right now, government-set interest rates are more or less zero. If you think about this, you will realize that when interest rates are zero, there’s only one direction they can go — up — which means there’s only one direction bond prices can go, which is down. Why would you buy an investment you KNOW is going to go down in price?

Because of these known risks, some people are apprehensive about making these types of investments as they could be missing out on money in the long run. Investments like this often get made in order to prepare for retirement and to ensure that you will be able to support yourself during this time. More recently, people have decided to turn their attention towards making investments in precious metals like gold, and silver as these values have been known to stay the same or even increase so you will receive more back on your investment. Places similar to Lear Capital, (you can learn more here) can help you to establish which metals are the best ones to invest in to ensure that you get more money back. When it comes to retirement and the amount that you save for this time, this could be one of the best investments to make. Make sure you are aware of what you are investing in before making a final decision as you don’t want it to have a negative effect on you.

If you have a choice between a 401(k) or an IRA, put your money into an IRA every time. The ONLY reason to EVER sign up for a 401(k) is if the employer also contributes money to your 401(k). In that case, you SHOULD sign up for the 401(k) and put as much into it as possible, to get the employer matching contribution; which, if you are lucky, will more than offset what you’re going to lose by entrusting your retirement savings to the mutual-fund system.

But, in all other cases, you should put your money into an IRA — either a traditional IRA or a Roth — because unlike a 401(k) an IRA allows you to invest your money in individual stocks.

I said “stocks.” Because, over the 200-year-plus history of the United States, common stocks have consistently outperformed all other investments by a wide maring over the long haul.

“Over the long haul” is a meaningful qualifier here, because there are times when stocks don’t do well. “Long-haul” means a period of time spanning several business cycles, i.e., more or less your lifetime. Which is the time frame in which you should think about your investments. Next year doesn’t matter all that much.

Nobody can “time” markets, so you shouldn’t try. Studies have been done about this, and they all conclude the same thing: Stay invested. Don’t panic and pull out of the market. Don’t be afraid to commit money to the market when everyone else is thinking doom-and-gloom; actually, that’s the BEST time to invest, because that’s when you can buy stocks at their cheapest.

Have you heard of “dollar cost averaging”? If you don’t know what it is, look it up on Wikipedia. It’s a darn good technique and will serve you well.

Dividend reinvestment. Same thing; if you don’t know what it is, look it up on Wikipedia. I endorse that, too.

How to invest in stocks? There are two mentalities that are correct. First, “value investing” as expounded by Graham and Dodd, and practiced by Warren Buffett, works and is the right approach. Second, the “contrarian” philosophy of investing isn’t the only way to make money in the stock market, but it’s one of the better ways. This means you don’t run with the herd, but think for yourself; when all the other lemmings are headed for the cliff, you step aside and do what makes sense instead of what is popular. It has worked very well for me over the last 27 years.

How to invest in stocks right now? Almost all the experts agree the best values in the stock market right now are blue-chip stocks in big companies that not only pay dividends but raise their dividends every year. Many, if not most, of these stocks have low prices relative to their earnings and dividends right now. And these unsettled times are a historic opportunity to buy them cheap.

Yes, that’s right, a panicky market is a great time to buy stocks. Let other people lose sleep over the world falling apart; I salivate when that happens. It’s times like these that I hate cash. Just when things look their bleakest is the time to unload your cash by buying cheap stocks. Someday the economy will boom, even bubble, again. When everyone else is rejoicing because stocks are flying high, that’s when you should sell and convert your stocks to cash. Then wait for the next crash. Trust me, there’ll be one, and you probably won’t have to wait very long. That’s how capitalism works.

This article, of course, merely reflects my personal opinion and is not meant to be interpreted as professional investment advice.


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