My 9 month 5.1% interest rate CD just expired. With interest rates falling and stock prices at record highs, you’re wondering where to invest right now. Four financial experts offered advice including how to take advantage of both interest rates and equity.
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At the beginning of 2023, I took a look at my uninspiring (and depressing) savings account and set a goal to grow it a bit more.
Living in New York might be difficult, but I made a plan to slowly put aside money every month. I achieved my goal by the end of the year, and in January I started thinking about how I could invest it.
I already had some exposure to stocks through ETFs and mutual funds in my brokerage account and Roth IRA, but I wasn’t sure where to invest my newly accumulated cash. The stock had just risen 22% in 2023, and there were still concerns about a recession in the market. Meanwhile, interest rates on safe cash equivalents such as certificates of deposit (CDs) were above 5%.
Hoping to buy time to see how the macroeconomic situation develops, I chose the latter and signed up for a nine-month CD at 5.1% per annum, reinvesting the interest each month.
Fast forward to today and I am swimming in a pool of regret. The economy has largely held up, with the S&P 500 continuing its decline and gaining another 22% since the beginning of the year. Admittedly, a return of 5.1% isn’t bad. But who among us with cash on the sidelines wouldn’t want to taste the sweet nectar of the stock market this year?
Still, even though my credit union’s 9-month interest rate has dropped to a not-so-attractive level of 4.65%, my apprehension about getting into stocks hasn’t changed much.
The labor market has cooled to an almost alarming degree, with the Therm Ruhr Recession Index being triggered in August, with statistics such as turnover rates, hiring rates, and year-on-year changes in full-time employees all declining significantly. Previous recession. Salary revisions were also significantly lower.
Meanwhile, the market has climbed even higher, with some indicators showing market valuations rivaling the most expensive levels in history. Goldman Sachs and Bank of America have both warned of disastrous returns over the next 10 years, with Goldman saying the S&P 500 index will be lower than the risk-free 10-year Treasury yield on an annualized return basis. It says it is likely to fall below 4.2%.
Hoping not to lose any money on a potential stock market reversal, but also hoping not to miss out on any more of the ridiculously good returns (what can I say? I want it all), I’ve made several I called my financial advisor and the market. In the name of writing this article, I asked for free advice from experts.
Perhaps the most important element in developing an investment plan is establishing a timeline. I just turned 30, so I’ll probably keep my money invested for several decades. So, like I said, I want everything, unless I need it for a down payment or something in five years.
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Robert Johnson, a finance professor at Creighton University, quickly cautioned me that I couldn’t do that and said that if I really needed the money within a few years, my timeline wasn’t really decades.
But Johnson said if I’m serious about keeping money in the market long-term, there’s really no bad time to get into the market. In another 30 years, the market will very likely be rising.
With that in mind, he said it would probably be a good idea to put some of the change I currently have into the market, leave it alone, and continue adding funds every month going forward. .
Still, I wasn’t completely convinced. I cover the outlook of prominent market players such as GMO co-founder Jeremy Grantham and top 1% fund manager Bill Smead on my beat. Some of them make bearish arguments, as Goldman and Bank of America have pointed out, and Grantham and Smead argue that if you invest now, the S&P 500 will deliver crazy returns over the next 10 years. It says that it will be.
That’s because when it comes to valuation, the starting point is very important. Bank of America says it determines 80% of the market’s 10-year returns. If you had bought at the height of the dot-com bubble in 2000, you would have lost 28% exactly 10 years later, ending in August 2010. And you would still have had the same amount all along. In 2013.
Instead of buying high and ultimately selling high, you want to buy low and sell high!
At the same time, after a few decades, you are likely to get a good return no matter what. The S&P 500 index is currently up 285% since the height of the dot-com bubble. However, if you had waited until the market low in 2002 to buy, your position would have increased by 587% today.
After voicing my concerns about valuations and a perceived deterioration in the labor market, Mr. Johnson stopped me and reiterated my long-term schedule in a tough-love tone. He also said there’s no way to know where the top is, reminding us of the 22% return we’ve missed out on so far this year.
Tuche.
“You can always play the what-if game,” he said. “If you invest in cash or invest in low-risk assets, the opportunity cost of return is huge.”
But there’s a way to play both sides, says Ryan Marshall, a financial advisor with Wealth Enhancement Group, which manages more than $96 billion.
You could invest some of your money in stocks right now and spread the rest over various CD playing times. So, for example, you could put 25% of your money into stocks, 25% into a 3-month CD, 25% into a 6-month CD, and 25% into a 9-month CD. Once these CDs expire, you can invest the money in stocks.
If the market goes up during that time, so be it. At least I had some exposure and was still generating a fair amount of interest in the CD. If the market goes down, even better. You can buy at a cheaper entry point and earn some interest along the way.
Jason Brown, founder of Alexis Investment Partners, went even further. Instead of buying a CD, you buy a duration-equivalent amount in Treasury bills. Because they are highly liquid, you can sell them quickly if you wish and keep the interest paid up to that point. With CDs, you usually have to pay back the interest if you cancel before the expiration date. Additionally, you don’t have to pay state taxes on the interest from the Treasury.
A man can have it all.
The strategy hasn’t been completely decided yet. But Chikako Tyler, CFO of California Bank & Trust, said the Fed is likely to cut rates further at its November and December meetings, so if you want to buy bonds or CDs, you should probably act quickly. said it was necessary to do so.
Regarding CD rates, he said, “Right now, banks have about two weeks to start making moves.”
So, like January 2023, it’s time to sit down, make a plan, and execute it.
If you would like to share your personal investing story or dilemma, please feel free to contact William at wedwards@businessinsider.com.
