Q: In your book, you take the position that there is no such thing as “investing.” In view of the fiasco on Wall Street, what advice do you have for those seeking speculation opportunities?
A. Capitalism is going through an epic transformation, and it is tough to predict what the markets will do going forward. We think it’s a safe bet to expect a global recession, and one that should last awhile. However, as Ben Franklin famously said, “Nothing is certain but death and taxes.”
Obviously the last place you’d want your money right now is in financial stocks. However, it may be time to hunt for bargains in “recession-proof” companies that tend to prosper in hard times, in undervalued commodities, or in emerging markets. But it is important to remember that you’re still simply speculating. |
Q. What about mutual funds? Are they safe? What can readers do to make sure?
A. Mutual funds are not immune from market swings, so they don’t qualify as a safe haven where you can “park” your money during uncertain times. We dislike mutual funds, particularly in uncertain times, because those with an open-ended structure do not provide a known or fixed price when you decide to sell or buy.
On September 29 when the Dow dropped over 700 points, some unlucky sellers had placed orders right before the House rejected the first rescue bill. By the time the orders were actually executed at the Net Asset Value of the funds, the market had already spiraled down. Unfortunately, that’s how Open Ended Mutual Funds work. We don’t give specific investment advice, but moving your money into bond funds, especially tax-free municipals, may make sense, at least until the market turns up.
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Q. Are emerging players like Brazil good places to invest or speculate?
A. Speculate is the right word to use, because the market there is so volatile. Three months ago, so-called "investors" were blindly in love with the Samba country. Fast-forward three months to October, and you see a country now grappling with its own liquidity issues and a marked depreciation of the real, the national currency. Trading at Brazil’s stock exchange, Bovespa, was suspended twice during the recent global markets rout. That said, there may be bargains ahead, and the offshore oil is still out there.
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Q. Are money market fund accounts at risk even after the government passed the rescue bill?
A. Money market funds were created as a proxy for bank demand-deposit accounts, with the advantage of higher interest on idle funds compared to the returns that standard bank savings accounts pay. The caveat of course, is that money market funds aren’t guaranteed the way bank deposits are insured by the FDIC. To prevent a wave of withdrawals, on September 19, 2008, the U.S government intervened to bolster the money-market mutual fund industry. The Treasury Department took money from a $50 billion fund created during the Depression to provide unprecedented temporary guarantees for nearly 38 million money market accounts. The plan is similar to the FDIC insurance for U.S. bank accounts, though it doesn't carry the $250,000 limit on reimbursements added to the $700 billion rescue bill. | | Top |
Q. Does it make sense to hire a professional financial advisor?
A. That depends on each individual’s experience, risk tolerance, and free time available to monitor a portfolio properly. Those new to investing may be wondering where to turn for reliable advice in planning their financial future. Now more than ever, a well-chosen advisor can be an important ally in creating and carrying out a long-term financial plan. For more on hiring an advisor, look here.
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Q. Should people pull money out of their 401(k)s or ride out the Wall Street turmoil?
A. It is important not to panic. Most people should sit tight and keep making contributions from their paychecks. The tax advantages of a 401(k) plan are significant, and if your employer matches your contributions, you are getting an automatic return on your investment, typically up to 50 percent. The market will rebound eventually, and you will get an even higher return for each dollar you contribute in the meantime, especially if you have a ways to go before retirement. If you are close to retirement, though, you may want to change your allocation to something more conservative.
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Q. How can readers find out about a company before they decide to invest again?
A. Find out as much about a company as possible before buying its stock.
That's like kicking the tires, looking under the hood, and taking the company for a test drive. For example, find out more about the business the company is involved in and evaluate its ability to compete in its industry. What is management's past experience? If a start-up company specializes in electronics and you discover that the executive team has had years of experience designing footwear, it's probably time to look elsewhere. To learn more about a company, conduct a Google search, visit its website or write to them and ask for informative documents like the annual report, prospectus and 10K filings with the SEC. An article with more detail on due diligence is available here.
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Q. Which of the commodity markets offer the best opportunities right now?
A. We do not recommend that people bet on commodities unless they understand the complexities and the risks and rewards of a highly volatile market. But when the going gets tough, speculators turned to "safer" commodities like gold. As long as this uncertainty in financial markets continues, it will provide strong support for gold. However, in these crazy times, you should know by now that nothing is guaranteed, and anything you do will be a speculation! |
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