Kim Snider
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July 28, 2005

Where To Put Your Safe Money?

If the stock market is too risky, where do you put your safe money? Of course, the conventional answer is to put it in bonds. I like bonds. I have said as much. If my only two choices were stocks and bonds, I would have my money in bonds. Fortunately, those aren't my only two choices because what I don't like about bonds is the return.

 

Over the period 1965 to 2003, a bond ladder of any duration would have returned between 7% and 8%. The worst year would've occurred in a 20 year ladder and been a -1.9% return. The best year would've also occurred in the 20 year ladder. That year would've returned 21%. (SOURCE: Ed Easterling; Crestmont Research)

 

This return is approximately the same as what you would have gotten by dollar cost averaging into stocks consistently over the same period of time - but with a lot less emotional turmoil because the gyrations are a lot less pronounced than with stocks.

 

One of the arguments "traditionalists" use in defense of the old asset allocation model of investing are the averages over long periods of time. Over x period of years, the average has been 8%, for example. What they leave out however is that the date you start greatly affects the end result. More specifically, the conditions on the date you start will greatly affect the end result.

 

For example, 20 year rolling stock market return ending in 1949 was only about 1%. Positive? Yes - but only just barely. The twenty year period ending in 1979 had a return of approximately 4.5%. Compare that with the period ending 1999 when the 20 year compounded return was about 15%. The same is true for bonds.

 

What affects the outcome? For stocks, it is the P/E ratios. For bonds, it is the interest rates. If you start investing in stocks during a period when P/E's are historically high your returns over 20 years will be quite low. If you begin investing in bonds when interest rates are quite low your 20 year return will also be low.

 

 

Chances are someone investing in bonds now is not going to get to that historical average over the next 20 years because they are starting from historically low interest rates. The same goes for stocks. The chances of someone getting to the 8% average on stocks right now is also low because we are starting from a period of historically high P/E ratios.

 

You can do the math. Let's suppose the yield today on a short duration bond ladder is about 4%. In order to get to the historical average of 8% we are going to have to spend some significant amount of time in the next twenty years at an interest rate of around 12%. The odds of that happening are extremely small. As my grandmother always used to say, "Nothing is impossible, just highly improbable."

 

(NOTE: If you would like to see all the data on this, I strongly recommend you spend some time on Ed Easterling's excellent site, CrestmontResearch.com. His book, "Unexpected Returns" goes into his research in detail as does John Mauldin's excellent book, "Bull's Eye Investing.")

 

My whole point in this and everything I talk about with regard to investing is that too much of traditional investment outcomes are dependent on luck. I don't want to hope I am born at the right time, retire at just the right time, start investing at the right time or that I get a lucky break in the market now and then.

 

That was fine when we didn't have to fund our own retirement and anything we made was gravy. Today, we need more certainty in our investments. We must be able to count on them regardless of market conditions. It's a whole new world. We have to invest a new way.

 

What do you think? How much does the inconsistency of the market and your returns weigh on you? Please leave your comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

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Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.

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