By: Jim
The traditional guide to investing or investing guide tends to focus on stocks and bonds and the benefits of the balance achieved by owning both. In past years this basic investment strategy has worked for the most part. Investing in 2010 and beyond might be a different story.
Any guide to investing or investment strategy for 2010 and beyond will need to make adjustments in focus. For many years the major investment houses have recommended a balanced portfolio consisting of stocks and bonds. Conventional wisdom assumes that investing 60% in stocks and 40% in bonds should produce good long term returns at only a moderate level of investor risk. Little attention has been given to the other asset classes or other major investment options.
Over the years investors and money managers tended to act and react to the economic environment in a somewhat predictable fashion. In bad economic times they sold stocks and bought bonds, which sent stock prices down and bond prices up. As the economic picture brightened they moved money from bonds to stocks sending stock prices higher. Both investments did well in the 1980s and 1990s as the economy generally grew and interest rates generally fell over that time period.
Even in more recent times a portfolio of stocks and bonds worked, as losses in one asset class were at least somewhat offset by gains in the other. Together they offered the investor both the higher income from bonds and the higher growth and profit potential of stocks. Plus, this basic traditional investment strategy produced a balanced portfolio with only a moderate level of risk. Investing in 2010 and beyond won't be that simple.
The real problem with the guidance provided in a traditional guide to investing or with the conventional investment strategy discussed above is the level of today's interest rates. In 2010 interest rates hit record lows, approaching zero in the money markets. When rates reverse direction and head upward in the future bonds will fall in value, period. Stock prices will fight an uphill battle as consumers cut spending, causing corporate sales and profits to fall.
Think "diversification" as your guide to investing in 2010 and beyond, and move some of your investment dollars outside of the traditional box of stocks and bonds. Include the other two asset classes in your investment portfolio: safe cash equivalents like money market funds, and alternative investments like real estate, gold, and natural resources mutual funds. The first will pay interest that increases as interest rates go up; and well selected alternative investments can produce profits to offset losses in a falling stock market.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.
About the author:
Jim is an author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com/.
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