A long time...

This week, the Federal Reserve Open Market committee met to discuss possible changes to their current policy of holding interest rates in the ultra low range of 0.0-0.25% where it is currently. As expected, they decided to keep rates unchanged. More importantly, were their much anticipated comments afterwards, which traders and analysts try to decipher to detect trends in the future. Fed Chairman Ben Bernanke stated in part, that even though there are positive signs of growth in GDP and the end of the current recession is at hand, the current unemployment situation is a problem that will take a while to see improvement. Because of this, the FMOC sees themselves holding interest rates at this very low level, for "an extended period of time". Meaning, it could be a couple of years before they see the need to begin raising interest rates again. Economists are not predicting the unemployment rate to decline to "normal" levels until sometime in 2012. So for people looking for rates to go back up on CD's, money market accounts, and other savings accounts, you might have a long wait on your hands. What does this mean for savers and investors? It might be time to begin looking at alternate options for higher yield. Longer maturity CD's (5 years or more), Bonds, and dividend paying stocks and/or ETF's, might be in order for people needing higher income. Some folks will have to move into some higher risk investments to make their long term plans work out. But everything has a risk. Staying in short, low yield, CD's carries interest rate risk, and inflation risk. Where do you need to be?

The risk of bonds

The recent news on the pre-packaged bankruptcy plan of CIT, is a real life example of the benefits and perils of investing in bonds. Up until the news of CIT's filing on Sunday night CIT bondholders were getting a 7.75% yield on their bonds. Stockholders had already seen their stock price plummet from a high as late as 2007 from over $60 per share to around $1. The news of the bankruptcy sealed the fate of the stockholders and even preferred stockholders, they will end up with nothing for their investment. But bondholders, will end up with 70 cents on the dollar, or a 30% loss on their principal. Nothing to really cheer about, but at least they walk away with most of their original investment returned. Works out to about the same kind of loss many people experienced in the stock market collapse of 2008. Had CIT not filed bankruptcy, these bondholders would have continued to collect their 7.75% coupons until maturity and then get their original investment returned, at least that is the way it was supposed to work. CIT's failure will be the 5th largest bankruptcy filing in history. While these types of events are bad news for investors of all types, it shows the benefits of being a bondholder over a stockholder. I would much rather try to make up a 30% loss than a 100% loss!

One Year Anniversary

I have now been writing this blog for one year. I originally started this blog as a way to capture my thoughts on various topics and share my insights with others, hence the name, Thoughts from Scott. Over time, this blog has morphed into a blog primarily about investing and saving. My posts are designed to give some useful and basic information to people who are or might be struggling in this area. Like an old, but popular and very funny TV commercial for Countrywide Mortgages a few years back, many people are "in debt to their eyeballs"! My thoughts and ideas on ways some people could help themselves by learning from my experience in working in a bank, I thought, might be beneficial. This blog is a way for me to comment on current events in the financial world, and also give back to the community.

Searching for yield

Investors and savers searching for income are starting to squirm. As CD rates continue to drop, those who have maturing CD's have a difficult decision to make. Do I reinvest my 5% CD into a 1-2% CD or take my chances in the stock market by buying a stock with a nice dividend? One option many people forget about is bonds. Bonds come in many varieties, Government bonds, Corporate bonds, and Municipal bonds, to name a few. Many people shy away from bonds mainly because they don't understand how they work. One perception is that they have a very long holding period, like 20 or 30 years. While its true that some bonds when first issued, can have a 30 year maturity, bonds can be purchased in the secondary market with maturities of a year or two. So if you're worried about inflation and interest rates rising again soon, you can buy a bond with a short time horizon. Another mistake is thinking that you can lose money buying a bond. Well, you can lose money buying anything. That's the risk of investing. But the way most people lose money with bonds is because they sell them for less than they paid for them, just like stocks. On the other hand, if you find a bond and buy it at a discount, you will make money if you hold it to maturity. In addition, you will collect some nice interest payments, called coupons, along the way. The other way you can lose money with bonds, is if they default. That is why you need to make sure to buy high quality, or investment grade bonds. These days, investment grade, corporate bonds can be found on the secondary market that are maturing in less than 5 years, that are paying 5-7% and can be purchased at a discount. Government bonds, while safer, are not paying anymore than CD's, and municipal bonds are much harder to find at a discount. Most are now selling at a high premium, making them less desirable. So if you need income, and can't stomach the paltry rates that bank CD's are paying, buy bonds! They're not as scary as you think!

Buy on the dips

One investing strategy that is coming back in vogue is the concept of "buying on the dips". This is where one would purchase stocks or add to your existing positions whenever the market makes small corrections. While some bears have predicted corrections of 10-15% in the recent months, which have never happened, smaller 1-3% drops happen on a regular basis. This is normal stock market activity. The "buying on the dips" strategy takes advantage of this situation. Since the March '09 lows, the stock market has now advanced over 60%. That's a lot. A much faster recovery than expected. Use your cash positions to buy good stocks that pullback on down days and you will be rewarded over time. Did you miss out on the monster Amazon day? Wait for a correction and buy it later. Use more strategy and less emotion in your buying and selling decisions and you will sleep much better at night.

New theme! After nearly one year since starting this blog I felt it was time for a new design. Please give me some feedback on your thoughts and suggestions.

3rd Quarter Returns

Investors receiving their 3rd quarter 401(k), IRA, and brokerage statements this month should have breathed a sigh of relief. Higher balances and improved returns have recovered most accounts nicely since the end of June. Those who may be disappointed are the ones who got out of stocks completely in March or April, only to see the stock market recover with returns over 50% since that time. The lesson? You can't out smart the stock market. Analysts and bears were telling people to get out of the market as the Dow Jones hit 7500, 8500, and 9500, only to watch in dismay as the index passed through 10,000 recently and some now predict it to hit 10,500 by year end. Determine the right mix of stocks and bonds that you should have in your portfolio based on your age, objectives, and experience, but everyone should have some exposure to stocks in their long term retirement accounts. Cash may be king, but not when it pays less than 2 or 3%.