Tag Archives: Stock Market

What do you do when there’s nowhere to invest?

nowhere to invest

Nowhere to invest? With a sky-high stock market, it often seems like there’s nowhere to put money.
Image courtesy Renjith Krishnan via FreeDigitalPhotos.net.

I had an interesting exchange with a reader named Bradley recently. Bradley’s basic question was “with the market at all-time highs, where do you put your money? It’s a good question because it does feel a bit like there’s nowhere to invest right now.

And it’s a particularly relevant question for me because I’ve been facing this exact dilemma with the recent windfall from the sale of my fourplex. Making matters “worse,” I just sold another piece of property so I have even more cash coming my way.

If you’ve ever made the mistake of reading any news site comment sections related to the stock market, you already know that there are two main contingents who both believe they are 100 percent correct: One says the market is headed for a crash very soon and only a fool would gamble his money in the stock market. The other group, equally sure their beliefs are correct, say the market will keep going up, up, up and only a fool stays out of the market worrying about a crash. (To get a handle on your investment portfolio, be sure to sign up for a free account from Personal Capital.)

Naturally, both sides are right and both are wrong. In reality, we all know that this market will undergo a significant correction at some point. We also know that the market will grow its way out of that dip. What we don’t know, of course, is when and we don’t know how long it will take to recover. That’s why the most important factor in any investment is the investor’s personal situation. For example, this is why people nearing retirement are typically advised to move to safer holdings as they age, although ironically people in this situation currently are among those who feel strongest that there is nowhere to invest. For some perspective, consider that my first money market account back in the late ’90s paid five percent!

There was a pretty interesting piece in CNN Money in January. While generally sticking with fairly standard allocations and advice, the writer reminds us that good ol’ cash also used to be seen as an asset class.

I recommend heading over and reading the whole thing. Lots of interesting data points pulled together, such as the fact that the market usually has a 10 percent drop once a year but hasn’t seen one in 2 1/2 years (at the time the article was published).  The writer suggests 10 years of disappointing returns await. And, oh yeah, the level of borrowed money in the market is already reaching pre-crash levels. So we’ve got a bubble again, inflated with Fed policy, borrowed money, greed and blind trust.

I might be the last honest blogger, because I’ll just tell you the truth: I have no idea what’s going to happen or when. I held my real estate winnings in cash at the end of last year, partly because I was expecting at least a small correction (which we’ve finally gotten a little taste of) and partly because I haven’t had time to really focus on it. (Which is not to say I didn’t do anything with my money last year. I actually was moving and reallocating funds quite a bit, which is still going on.)

So far this year, I have picked up a few individual stocks when I see a good value, but I’ve held off on buying much more in the way of mutual funds so far. And, in fact, I’ve been moving more money into cash, as I finally dump some stuff I’ve been packing around with higher costs. I’m dreading the tax impacts after this year, but I just want to clean up my portfolio.

My short-term strategy right now is to go ahead and sell my high-cost funds (I have seven of them left at this point with various amounts of money in them). Thus, my cash position is increasing. I’m selling those semi-quickly. Meanwhile I’ll be moving this cash back into individual stocks and/or low-cost Vanguard funds — however, this will happen much more slowly, basically dollar-cost averaging my way back in. By default, depending on how slowly I move these dollars back into the market, I’ll be effectively keeping significant assets in cash as well. I don’t want to say I’m hoping for a big market crash, but if one were to happen, this would be a pretty awesome time.

So that basic framework aside, let’s get back to the main question: what do you do when there’s nowhere to invest?

Let’s start by recognizing that, really, there is always somewhere to invest. Maybe with a sky-high market, now isn’t the time to move a large sum in all at once. But there are always a few undervalued stocks. But you have to be careful. It always rains after I wash my car and the market always dips when I make a purchase. And with the market so inflated, I have been thinking quite a bit about what options do exist outside the usual menu we typically think about. Here are a few things I’ve thought about.

Pay off debt

If you’re carrying any consumer debt at all, this is a good place to start. Whatever your interest rate is on the debt you’re carrying is your effective return by paying off that loan. Still carrying a car loan? Maybe instead of buying into an over-inflated stock market, you pay that car off for good. The free cash flow you now enjoy could dollar-cost average its way into the market or you could save it up so you’re ready to pounce when things drop.

Keep funds in cash

Why consider holding money in cash? Well, on one hand it’s a defensive move — you’re protected from a big crash. When everyone else is panicking, you’re kicking back on your pile of cash. That pile is, however, slowly disintegrating under you, however, as inflation eats away at your buying power. There is another advantage, of course. Imagine if you’d been sitting on big pile of cash during the real estate crash. I know if I didn’t have all my money tied up in, yes, real estate, I would have been on a shopping spree. Thus retaining cash can be an offensive move as well. Sit, wait for a big drop and start swinging your big weapon.

Pay off your house

If you don’t know where to put your money right now but you’re still carrying a mortgage, perhaps it’s a good time to increase your security by putting a bullet in your mortgage. If you’re worried about missing a big market dip, maybe open a HELOC on your now paid-off mortgage. If things look irresistible, you can pull out the funds from your house again and take advantage of market conditions. Remember the crash you’re waiting for could be two or three years away and you could be enjoying the cashflow improvement in the meantime.

Lower your overhead

Recently I wrote about forcing cashflow and how it can hurt you or benefit you. If you’ve got a sum of money and no place to put it, spending some of that money on increasing your cashflow situation can be a savvy move. For example, I’m still considering making the move on solar panels for our house (no-brainer if we’re going to stay in this house long-term). A $15,000 investment in solar would permanently remove our $75/month electricity bill. The downside is it doesn’t pay if we move. But the idea is the important part. For you, it could mean upgrading to a more efficient car, new insulation for your house, moving closer to work, buying new clothes that don’t need dry cleaning. You name it.

Increase your security

You could also tap your funds for  increasing your financial security as well. This might mean stepping up and paying for a few things now just so you don’t have to bother with it later. Maybe your roof is starting to fail — writing that check now while you have the cash not only removes a hassle from your list, but think about the alternative: Imagine you bought in big to the market at the top and suddenly find yourself with several years of waiting before you’re out of your hole. Then, while you’re waiting, the roof fails completely, leaving you in desperate need for cash. By making sure these aspects of your life are rock-solid now while you have this free cash, you’ll be in a much more solid position when crash time comes.

Be creative

People forget there are other places to invest outside the stock market. There are too many to list here, but for example a guy I used to work with owned shares in a local pizza place. There are always people looking for private investors — some people have friends or family who are interested in starting business for example. (Be careful!) You could even buy a small business if desired. Always wanted to own your own restaurant? Now is your chance! If you can think of it, you could probably make it happen. Have a great idea for a mobile app? You could probably hire a development team overseas for less than $20,000 and bring your idea to reality. In addition, there are online lending options such as Lending Club or Prosper where you can make a decent rate on your invested funds.

Jump in anyway

And, of course, where most of us will end up is back in the market, hoping any dip is not too deep or long-lasting. This is where I’ll probably end up as well. I’ll dollar-cost average my way in, at least, but more than likely I’ll limp my way back in and just wait out any dips, just like I always do. In the end, prudent, boring investing in low-cost index dividend funds is usually the best bet. But when you have a big chunk of cash you’re sitting on, it’d sure be nice to start out with a lower price.

What do you think? Any other creative places to put money while the market remains so high? What would you do if you had a large sum that needed a home?

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What is the best way to invest $100,000?

What would you do if someone handed you $100,000?
Do you think you know the best way to invest this money?

money3Americans have a unique challenge in life and have developed an adaptive skill that people from many other countries can barely even conceptualize. Although it’s a very real problem for we Americans, in many parts of the world they’d give almost anything to have this problem.

The problem: Too much choice.

The other day I spent 30 minutes looking around on Netflix for the movie that was an exact fit for my mood at that exact moment. We walk into our grocery stores and have to apply our well-honed, complex analytical skills to decide which cheese to purchase. Want cereal? Flakes or biscuit? Sweet or savory? Real sugar or HFCS? Should my eggs be cage-free or vegetarian fed? Both? But those are $6! Time to paint the living room? Choose from 10,000 unique shades of light brown! Whatever the choice of the moment might be, we in America spend a lot of our time wading through various buying choices and these choices are a reflection of our person and a projection of our aspirations.

I would flip through catalogs and wonder, “What kind of dining set defines me as a person?”
-Jack, Fight Club

If you’ve ever seen a recent immigrant shopping in an American supermarket, it can be fascinating. Often it’ll take them forever to make a decision as they carefully wade into this sea of decision-making. Those of us who have been running this gauntlet for some time now have built up resistance to the sensory overload that is a modern store. We can usually zip through using well-tread criteria and remain unscathed.

When it comes to deciding the best way to invest, it’s not always so easy

Since I recently sold my fourplex, I now have some investment funds to redeploy. After cleaning up some other financial loose ends, I’ll have about $100,000 to invest elsewhere. Getting to this point was easy compared to the next step of actually pulling the trigger. (Incidentally, the first step in getting organized in investing is to sign up for a free account with Personal Capital so you can get a handle on your current situation. You can learn more here.)

Like a freshly arrived Somalian’s first visit to a Seattle Safeway, I’ll admit to being somewhat overwhelmed by my options. So I turn to you, readers, to help me out. What’s your advice for someone with a chunk of change in his pocket?

I’ve been considering a few different options over the past few years I’ve been trying to sell the fourplex. Many of them I was completely ready to move on at various points but since I couldn’t access the funds, they never happened. Some of those ideas have been completely dismissed while others are still being considered.

A few of my favorites:

Is more real estate the best way to invest this money?

Real estate is like a drug, and I’m hopelessly addicted. I love how it’s in my control (mostly) and I love how it’s tangible. With my own effort, I can enhance a property to increase its value. During the depth of the real estate crash, I was licking my chops at some very underpriced single-family homes, particularly in the city of my birth, Vancouver, Wash. Check out the inventory! There are a ton of decent houses available for less than $200,000 right now. Using my funds and tapping our home’s HELOC fund, I could pay cash* for one of these babies. Hard to resist! Rents in that area are pretty low, at maybe $1,200/month for something pretty nice. I could basically earn a 5%+ yield (although surprises always await with real estate!) and potentially also get some additional gain from equity growth as the market improves in that area.

(Interesting side note about this area: A few months back I was looking at what kind of inventory was available and I noticed almost every listing’s status was “short sale pending”. Page after page of listings. Then I read about how companies like the Blackstone Group were buying in big to the single family housing market and renting the homes out. I’m pretty sure these big investment firms were single-handedly driving up the prices. If I could have sold my plex a couple years ago and pounced, I could have already made well over $100,000 down there.)

So if I get lucky, I could earn something close to what I could earn investing more traditionally PLUS there is the potential to hit another jackpot. If the economy got quite hot in the Portland-Vancouver area, a price increase of $50,000 to $100,000 isn’t out of the question. But if the economy was doing that well, a stock market investment could do quite well also.

On the other hand, if I get unlucky, just a few repairs could wipe out every year’s income. Or, even worse, I could get dragged into negativeland and would need to cough up cash to support the endeavor. Additionally, the sporadic, unreliable income is what made rentals so unappealing with my fourplex. If I’m only going to earn 5% or less, I’d better not have to take a bunch of annoying phone calls to get it.

If I went this route, I’d plan to hold for three years minimum, and hopefully five years maximum.  Hmmm…

What about REITs?

Instead of buying real estate that I have to personally deal with, buying Real Estate Investment Trust funds might be the best way to invest this money. These funds let you be invested in real estate and as an investor with others instead of holding the bag all by your lonesome. I have a few REITs already but hadn’t bought in further because I was already so deep in real estate. I’m still considering this direction.

Why not just buy individual Dividend stocks?

If you read my post on Dividend Mapping, you know I’m somewhat entranced by dividend stock investing. Yes, like any investment it carries some risk and has its own share of pros and cons. My favorite things about dividend stocks are that they’ll continue paying as normal whether the price goes up or down. From an income standpoint, it’s a little more “controlled” in the sense that the dividends drip in like clockwork, helping me avoid some of the wild swings of real estate. That stability alone is worth something to me after dealing with the roller coaster of real estate income over the past decade.

I’ve done a bit of looking around at what individual stocks I could pick up, in a modified version of Dividend Mapping. Really it’s closer to creating my own mini mutual funds. I’m pretty happy with my selections so far. I found some stocks that I wouldn’t have otherwise noticed that I really like. So why not just buy in? Well, my track record of buying anything outside of a fund is atrocious. You know how it always rains after you wash your car? That’s how it is with me and stocks. I used to joke to my friends that they’d better sell because I was buying in, thereby guaranteeing a drop. Yes, it’s been that bad. So that eats at me when I consider pulling the trigger.

Could a good ol’ fashioned Vanguard fund be the best way to invest?

In what is probably the simplest approach, I could just buy into one or more Vanguard funds, such as the Total Stock Market Index (VTSMX). They are tried and true and in some ways this would be the lowest risk approach. They also have some managed payout funds that I haven’t really looked into yet. Probably the smartest thing to do from a traditional investing perspective would be the classic combination of total stock market, bonds, some international, etc. to provide the diversity needed down the line.

So on the plus side, there are solid, relatively safe investments available. On the negative side, I’ve felt like we’re overdue for a market correction and buying in now would almost guarantee it! If the market took a fairly big dip, that would certainly make my decision easier.

How about a combo platter?

Naturally combining several different approaches is often the best way to go. It gives you good solid diversity and also lets you catch a wave if a particular sector takes off. But what combination?

I could also dollar-cost-average my way in to some of these choices to protect myself from a sudden drop, but that entails leaving a big sum of money uninvested.

So how do I decide on the best way to invest this money?

I’ve (obviously) never been a very skillful investor. I did well investing in myself (education and career learning) and I got lucky more than once. My lack of confidence in market investing pushed me toward real estate and I was fortunate that my timing coincided with a low interest rate era that caused a big housing spike.

The interesting thing about my current conundrum is that had I received the same amount of money over a number of years, it would be much easier to decide where to put it. It’s the Power of the Chunk in action! Get a big chunk all at once, the stakes immediately seem much higher! Taking a big hit in the market would hurt much more after dropping in a big sum of money than it would before I was using it as income and when it was just a collection of smaller investments (if you follow me).

So here I am, looking at my various options, thinking about what to do next. I can tend to be an over-analyzer and the waiting carries its own danger as well. I’ll be sure to let you know what I decide!

What do you think? What is the best way to invest $100,000? What would you do if someone stopped by your house and handed you a check for $100,000?

Let me know your thoughts in the comments. And if anyone wants to write a guest post on this topic, send me a note through the contact form. I think it’d be great to have a few different voices weigh in on this topic. 

*Paying cash isn’t my first choice, but last time I checked, the credit market was so tight that getting a loan was near impossible even though I wouldn’t be using my income from working to pay for it even if I had a job. It might be possible these days, but I haven’t looked into it. 

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