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Where To Invest Outside the Stock Market

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Stock MarketI quit investing in the stock market.

OK, just kidding, I didn’t really quit. I haven’t changed my retirement contributions in anyway (though I feel foolish every time I see a contribution go through, followed by the stock market falling even further). I left my retirement contributions alone because my time horizon gives me the the benefit of time, the one certain cure for this economic malaise.

However, we have stopped contributing to our taxable brokerage accounts simply because of how violent the market has become. Check out the CBOE volatility indices:

  • VIX – S&P 500 Volatility Index
  • VXN – Nasdaq 100 Volatility Index
  • VXD – DJIA Volatility Index

The volatility indices show the market’s expectation for volatility over the next thirty days and as you can see on their charts, they’re at all time highs. That’s why we’re not putting in any more money, we are going to wait until things calm down before we add back in. (That account was for savings on items we need beyond the next five years)

So, without the stock market, the next question is where should we go with our savings?

Bolster The Emergency Fund

This is never a bad decision. With the economy the way it is, we should use any abundance we have left to start saving for potentially leaner months (or years) to come. If you listen to any experts, you might notice more and more are bolstering up their cash positions. As regular people, emergency funds (and CDs/High Yield Savings) are our cash positions and it’s never a bad idea to squirrel away a few nuts for the winter.

Pay Down Debt

If you have any debt, whether it’s a 6% mortgage or a 20% credit card, paying it down is a smart move. Some would say that you should invest your money and take advantage of the leverage, but I think that’s a little too risky given the volatility of the market. The rewards you will reap by getting rid of your debt will far outweigh the potential gains you’ll earn in our current market. I’m not saying that the money you put into the market will be lost, maybe we have hit the bottom and its on its way up, but by paying down debt you free yourself in a way a few extra dollars in stock gains simply won’t. Also, when you pay down a debt, that rate of return is guaranteed.

CDs & High Yield Savings Accounts

There’s nothing wrong with taking the 3-5% APY of a certificate of deposit (the best cd rates are hitting 5% APY) or a high yield savings account (the best high yield savings account rates are near 4% APY). I think there is a stigma against taking these “safe” gains because we have it in our heads that the stock market can yield returns of 10%. The reality is that the 10% metric is one that’s been overplayed and so ingrained that people are looking at the volatility in the market today and wondering how that figure could possible be correct. It’s not. The market may have yielded gains of 10% since the beginning of time but as all mutual funds state – “past returns are not indicative of future performance.”

One thing is certain though – a certificate of deposit or high yield savings account will get you that yield. The worst case is that you get your money back (bank failure). Unlike money market accounts, CDs and savings accounts are FDIC insured and you’re protected from loss.

Take the safe bet, it’s OK!

Invest In Yourself

Now is the perfect time to invest in yourself by taking some classes, buying some books, and otherwise augmenting your skills to make yourself a more attractive employee or prospective employee. Investing in yourself is one of the best things you can do with your money as knowledge is something that can stay with you for a very long time and there’s always something you can learn.

You don’t have to go as far as taking a class but if you’re in an industry where certifications, and the knowledge those certifications confirm, are important, go out and test for them. In certification heavy fields, many requisitions are filled by those certificates.

Invest In Money-Savers

It’s often said that replacing a ten year old refrigerator can yield significant cost savings (some figures claim $100-$200 of savings [1] [2]). If you have a ten year old refrigerator, consider taking your investment money and replacing it. Let’s say you buy a $2000 fridge and it saves you $100 a year in energy costs – that’s a 5% return on your investment. Since that 5% isn’t taxed, that’s the same as a 6.67% return in the stock market if you’re in the 25% marginal tax bracket. 6.67% return, a new fridge, and being nicer to the environment isn’t too shabby, is it?

There are plenty of other money-savers you can find both in and outside of your home.

Do you have any suggestions on where people can invest nowadays?

{ 17 comments, please add your thoughts now! }

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17 Responses to “Where To Invest Outside the Stock Market”

  1. Miranda says:

    Thanks for the great tips! I especially like the one about debt. Sometimes we forget that what we pay in interest charges can be damaging to our overall net worth.

  2. fred@opc says:

    For a long time I have been preaching in my friend circles that paying down your mortgage SHOULD be the conservative component of your portfolio. You get a guaranteed X.XX % return (for many folks these days, 6.00%). The 30 year treasury is only returning 4% (tax free) right now. You’d have to be in the 35% tax bracket for it to make more sense to buy t-bonds than pay a mortgage.

    Plus, unless you’re investing in retirement accounts, paying down your mortgage is safer from a legal perspective. Your retirement (401K, IRAs) and home can’t be taken from you in the unfortunate event you were sued and the other person won (e.g., bad car accident). Investment accounts, investment properties ARE fair game – if you have them, you should make sure you have sufficient personal liability insurance.

    Finally, and this isn’t a *great* reason, but it is important for some. Once you put that money in your mortgage, it is MUCH harder to get that money back (you have to refinance, take out a HELOC, etc). With an investment account, you can just withdraw the money. If you’re the type of person that likes to keep barriers between you and your savings, paying down your debt is a much better way to guarantee you don’t spend that money on a new Lexus you (and I) can’t afford.

  3. KJ says:

    Excellent tips! I don’t want to get too off-topic, but the I take a longer view on the VIX. It reached an all time high around 150 in Dec 1987′ish. So it’s still far from that peak.

    Still, I like the fact you’re looking at these Volatility indexes and sharing great advice. I plan to “re-use” some of your tips in my family / friend circles as I always seemed to be asked about Finances.

  4. Al says:

    KJ made a point I’d like to second….when the VIX hit its all time-high in December of 1987, where did the stock market go from there? Up. And up. And up. And what happened to the stocks in the S&P 500 that people purchased when the VIX was at its all-time high? They went up, and up, and up! If your favorite shirt, blouse, dress, etc. is half-off at Macy’s, you run out and buy it, right? So if your favorite stocks are half off in the stock market, what do you do? Go into CDs and cash? No, silly! You buy! I still kick myself for not buying more when the market dropped 22 percent in October of 1987 and the Dow dropped from 2200 to 1700 in a day. (People today are freaked because the Dow slipped below 10,000. The stocks I bought at 1700 are still pretty valuable!

  5. Anonymous says:

    Agree 100% in the need to invest in yourself. Completing an industry accreditation or a professional certification should be a constant task.

  6. Jeremy says:

    Or if you don’t want to get out of the market but want to make money as it goes down, stick a little money in a short ETF or ultrashort ETF ;)

    I picked up some ProShares UltraShort Midcap 400 (MZZ) for around $85 a share a few days ago. Today it’s at about $98. A nice little 15% return.

    Of course, I don’t recommend this for most people, and you should stick to the advice Jim has provided :)

  7. Mike says:

    “Do you have any suggestions on where people can invest nowadays?”

    You always have good advice for people Jim, but I have to disagree with you one this one point.

    NOW is the time to buy stocks, when they’re on sale. There are some very profitable and stable companies out there trading at significant discounts.

    While people may also be worried about contributing to their 401ks, this is the time when DCAing really pays off. I’ve actually boosted my 403b plan contribution up to 25% of my paycheck. I know it sounds scary and counterintuitive, but it’ll pay off a few years down the road.

  8. Gates VP says:

    Man you just took like a week’s worth of articles and crammed them into one :)

  9. kitty says:

    “You get a guaranteed X.XX % return (for many folks these days, 6.00%). The 30 year treasury is only returning 4% (tax free) right now.”
    This really depends on what you think about the possibility of inflation. Sure right now you only get 4%, but the probability of inflation over the next 30 years is pretty tangible.
    At least this is what a couple of (well off) friends of mine think, and they’ve been right on the money before: they got out of the market on time in 2000s; they also got out of the market last year and invested in gold and short ETF. Just a couple of weeks ago they bought a vacation home. They have about twice the cost of the home in only one of their investment accounts, yet they chose to take the mortgage specifically they think we’ll have inflation. I am not sure they are right, but it is something to consider.

    Jeremy, I did it a couple of days ago, but I got SKK (ultra short Russell 2000), but unfortunately with only a small amount. I am up about 10% in one day. I wonder if we are close to the bottom though: usually when the panic level that high, it means we are close. I will watch tomorrow and decide if I want to buy another short ETFs or sell this one in case the G7 meeting over the weekend is successful in doing something to get Libor down.

  10. Miss M says:

    I’m trying to convince my other half that he needs to follow the invest in yourself approach right now. His industry, Hollywood set designing, isn’t doing so hot and he hasn’t worked in months. That makes it a great time to get back to school, he’s not earning money anyway, and employers pay more for brain power than brawn power. I’m still doing my regular investing and I’m not sure what to do with my cash, I just paid off a car loan and it freed up a lot of cash. For now I’m setting it aside hoping to pick up a house cheap soon, but I’m worried I’ll kick myself later for not investing more heavily right now. If you don’t have other uses for your cash and at least a 10 year horizon, definitely now is the time to invest.

  11. I agree with most of this except the bit about the market and it’s 10% return. The more conservative number I follow is an 8% annual return and it’s important to note that this is over a long period of time. How could that be correct? Because while it may go down 25% this year, it means next year or the year after will have huge gains. Gains you may miss out on if you pull your money out and try to time the market. Past performance may not be an indicator of the future, but history (over a long enough period of time) certainly is.

  12. Hal P. says:

    Great advice. I particularly think that paying down debt is a key and should be focused upon. Frankly I think that should be number 1 on the to do list. Definitely setting aside some money for difficult times coming is a must too. That is to say I think that we are in for some difficult time in the coming 12 months as I think we’re in for some major inflation.

    I noticed you didn’t mention any precious metals investments. Do you think there is any value to be had in purchasing “real” gold and silver. I say real as I know some invest in “paper” versions.

    Also, what’s your take on credit unions as opposed to banks? With all the banks crumbling and being bought out taking more money from the FED I particularly find it worrisome.

  13. BankFreeInvesint.com says:

    Stock market junkies will continue to give you bad advise, like diversify, think long term, yada yada yada.

    Invest in real estate, the best asset class. I am sure that some will argue that real estate is risky too.

    Well, check this out http://www.pwcreval.com/value_cycles/cycle_methodology.pdf

    If you chose to purchase at stages 8-11 then you are screwed. We are between stages 2 and 3 in many markets. Find below market properties which cashflow and hold them until stages 7- 8 and then sell or continue to hold them for a long time for cash flow.

  14. Ron L says:

    My belief is most people have reasonable skills. You might have mechanical, carpentry, computer, electronic, or maybe just sales skills. Make you investments center around what you know and enjoy. Example if like riding motorcycles and working on them by the destressed ones, the wrecks, the forclosures,and the ones people bought and decided they wasn’t you them. Fix them, use them, and resale them. The secret is never get attached to those things and keep buying and selling. Keep in there is no profit till you sell.
    Take you profits in anything like rental houses, farmland, ect. I prefer to invest in things I can see and controll rather than in stocks someone else controlls.

  15. peter russell says:

    Invest in yourself – Yes.
    Invest in real business – Yes.

    Currently several fantastic oportunities exist for cash investors around the world.
    These opportunities involve real businesses, with real products that will always be NEEDED and find a place in international markets.
    And they create jobs, alleviate poverty, raise standards of living, and are operated by real people, not greedy faceless corporations.

    These opportunities also offer good ROI – 40 to 70% range. However, they are not suitable to many corporate investment houses due to scale. Often capital must be committed for a year or two before gains can be realised, due to build-out time and product maturation.
    Feel free to ask. peter_russell@att.net

  16. Levon Mkrtychev says:

    Paying down the mortage is a great idea like you said b/c the return is basically the interest you would have paid if you didin’t do that. That’s 6% for many people, and you can be sure about consistent returns.

    Also, buying silver and gold is a great option if you don’t want to invest in stocks. Silver is especially hot right now. I started dabbling in silver in Feb. 2010 and I bought my first two ounces for about $17. Now silver is going for $36 an ounce and I don’t think it wil go down anytime soon.

  17. Jim says:

    Don’t forget gold.


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