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Bill Freehling is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Bill Freehling.
Looking for safe harbor? Don’t bet it all on past performance
WHERE is the safest place to park your investments during these volatile times in the stock market?
That’s been the cover story of numerous recent publications, including last week’s editions of Smart Money and Barron’s.
The Barron’s article focused on mutual funds that have held up well during recent downturns, while Smart Money’s dealt with picking individual stocks.
Most of the advice you see on this topic is to buy stocks in industries that do well regardless of the economic times and that pay a steady dividend.
These so-called "recession-proof" industries usually include tobacco, alcohol, health care, consumer staples and utilities–ones that people will use no matter how bad times get.
The problem with this strategy is that just because they’ve held up well in past downturns doesn’t mean this one will be exactly the same. Further, if everyone thinks that these companies will be safe, that optimism has probably already been priced into the stock.
That’s not to say that these stocks won’t do well this time around, but the present doesn’t automatically equal the past.
Another option is parking your dough in a short-term vehicle such as a money-market account or U.S. Treasury bills.
But as Roger Lowenstein writes in his latest Smart Money column, the Federal Reserve’s zeal to keep the credit markets going by cutting interest rates has diminished the returns you can get on these short-term accounts. It’s also increased the fear of inflation, which zaps the purchasing power of your deposits.
Again, this doesn’t mean that having cash as a safe harbor is a bad thing. It’s just not quite as lucrative as it was nine months ago.
So what’s the next option? Smart Money also has a feature this month about how people are spending tens of thousands of dollars building state-of-the-art decks on their homes. Some of these are more than 1,000 square feet and include amenities such as hot tubs, gazebos and kitchens.
According to the article, an investment in a deck recoups 85 percent of its cost when the home is resold. That’s the best return of any remodeling project.
By contrast, according to Smart Money, here are the amounts recouped at resale for other remodeling projects: siding replacement or minor kitchen remodel, 83 percent; window replacement, 81 percent; bathroom addition, 66 percent; sunroom, 59 percent; and home office, 57 percent.
Of course the easiest thing for most people to do is automatically invest the same amount of money every month in an index or mutual fund. That’s how most 401(k) plans are set up. It takes the emotion out of investing and allows you to buy whether the market is up or down.
And then there’s always the cash-under-the-mattress option, but we’ll save that for a later date.