Are gold and silver the right investments right now? How have these investments typically performed during recessions
Gold and silver are often said to be good investments in times of recession. The main reasoning for this is gold and silver often move in the opposite direction of the dollar. Many hold gold as an inflation hedge. This practice is flawed according to Gary North, an economic analyst, and Richard Eisenberg of Money magazine. Americans have only been allowed to own gold for the past twenty years and over this time the value has stayed right along with inflation but not outpaced it.
There are several ways to invest in precious metals.
Bullion or the actual metal
Accounts or certificates
Precious metal stocks
Precious metal mutual funds
Upon examining the results of the current recession on two mutual funds, one being Fidelity's Gold Fund and the other being Fidelity's Contrafund which consists of blue chip stocks, the Gold Fund lost 33% while the Contrafund lost 39%. However, over the life of the two funds, the Contrafund outperforms the Gold Fund by 4%. Though precious metals may hold their value slightly better in a recession, over time they under perform stocks.
For additional information or graphs:
The MONEY Book of Personal Finance
The Only Investment Guide You'll Ever Need
How can an inexperienced investor really tell the difference between fraud, speculation and conservative investing? Are there any rules of thumb?
1. First it is important to understand why it is good to find good investment paths during a recession. And how to invest smartly during a recession. Naturally, people are fretting over the falling of stability and the lack of money available to them. This can cause people to become dishonest, lose sight of the truth and purpose of money, and perform horrible acts just to get their hands on money. During a recession scams increase. People are vulnerable and dying to find ways to secure their money and during their moments of weakness desperate people will take advantage of those who are not prepared to protect their investments, especially inexperienced investors. It is a fact of life. Going to legitimate sources like http://www.smartmoney.com/investing/stocks/how-to-invest-during-a-recession-9850/ will help one learn how to invest properly and wisely during a recession.
2. The first thing one should take is to look up what (conservative) investing, speculation, and fraud are. A good place to look for the latest scams is www.fraud.org. Also, check out websites like www.cnnmoney.com, http://www.abiworld.org//AM/Template.cfm?Section=Home, http://www.ehow.com/about_4684782_what-is-speculation.html, http://investment.suite101.com/article.cfm/conservative_investment_strategies, and www.consumer.org. These sites over information about scams, frauds, bankruptcy, speculation, and other tips on how to handle money and investments. All will contain links to more legitimate and useful sites about the subject too. They should have resourceful and legitimate answers to any questions one might have.
3. Once obtaining an understanding about investing, speculation, and fraud, the second step one should take is to sit down and talk with a financial advisor. Hopefully, you all ready have an advisor who help set up existing investments. It is wise to discuss with the advisor what options you have with your current investments and what options you can obtain or hope for during a recession. If you do not have investments all ready, recessions could be a good time to buy your way in. Most investments are cheap and generally in a few years the prices rise back to normal levels and continue to fluctuate like a capitalistic market does. A great place to go if you do not have an advisor or are looking to change advisors is Charles Schwab. Here is the website: https://www.schwab.com/public/schwab/home/welcomep.html?src=nay. I would also search this website you are currently on, www.scottmarsh.com, for really good information about investing, speculation, and fraud. These people have spent hours finding the best information available.
The following few paragraphs have descriptions of what conservative investing, speculation, and fraud are. They also have steps to avoid bad fraud and how to invest or speculate wisely.
The most important investment paths are the following three: Getting out of debt, Having a large and substantial food storage, and living way below your means. These three concepts are the best investments anyone could do. These will help you and your family when you are in a real bind. If you live these three concepts, then come hell or high water you and your family will be better off than previously thought.
4. The best type of investments, in general, are diversified and allocated. Another wise tip is to follow a historical pricing model of buying low and selling high. What is diversification? It is when a fund, mutual or index, has more than one company in it. Allocation is when there are more than one type of investment. For example, a diversified and allocated fund will have BOTH stocks and bonds from more than one company. How does one go about getting a portfolio like this? Go to a financial advisor. A good one is listed in a previous paragraph. Also, they will help you pick the best fund with the best investments. They will help you take care of it. Never forget that during a recession the market has a dim outlook, but it is only temporary. Following a historical pricing model (an advisor can help you with this) to see the long term market performance of stocks. You will find that long term, the market is very efficient and even though it may look ugly during a recession, it doesn’t mean it will be like that forever.
5. A general rule of thumb for conservative investing is to find investments with little or no risk. Examples of those are: Government Bonds/Debt, Money Market / Bank Accounts, CDs, Notes, U.S. Treasury Bills, or Cash and Cash Equivalents. These are safe, can offer short or long time guarantee of a return. You will always get your money if it is a government bond.
6. If you want a little risk and possibly a bigger return, the following investin options are a good idea. Keep in mind they have more risk than the options mentioned in the previous paragraph. They are: Real Estate, Equity Mutual Funds, Large/Small Cap Stocks, High, and Income Bonds/Debt. These are a great way to go, but be careful with them during a recession. It is smart to ask a financial advisor for help concerning these.
7. Speculation is more tricking and not the smartest move for an inexperienced investor during a recession. It is defined as “Purchasing risky investments that present the possibility of large profits, but also pose a higher-than-average possibility of loss. A profitable strategy over the long term if undertaken by professionals who hedge their portfolios to control the amount of risk.” This is not considered conservative investing. It is more like gambling. What does speculation look like? It is real estate flipping, options futures, arbitrage, hedge funds, or currency trading. These examples are not conservative investing and should not be dealt with if inexperienced.
8. What is fraud? It is “An Illegal activity of trying to conceal information intentionally for personal gain. Many frauds involving financial transactions are committed by business professionals, who use their knowledge and gained credibility to deceive customers.” This is bad to fall into this trap. To avoid fraud one should consult more than one advisor and more than one resource to make sure they are legitimate.
9. I would go to this website http://www.sec.gov/investor/pubs/inws.htm. It offers tips on how to invest wisely. The best thing to do is to know what fraud, speculation, and conservative investing are and the differences between them. Hopefully, the information above gives you an idea and offers links to more information.
Was there anybody who forecast the severity of this meltdown? Are there investment advisors out there who predicted that this crash would occur?
Ask the countless retirees that had their financial portfolios reduced substantially during the last year just how important reliable financial information is. Almost all investors rely on the information that “insiders” provide when making their financial decisions. Of course, no expert can provide you totally correct information. In the words of Peter Lynch, “You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in financial markets.” (1) The trick is finding financial advisors that will provide you honest information that is more accurate than what you would have come up with on your own.
Few— if any— credible financial advisors predicted the severity of the current economic meltdown. For the uninformed investor, even more discouraging is just how blatantly wrong many of the “credible” financial advisors were. Six days before Bear Sterns went under; Jim Cramer stated on national TV, “Bear sterns is fine—bear sterns is not in trouble.” Three months before Lehman Brothers went under; CNBC insinuated that Lehman Brothers was in good health by stating, “Lehman brothers is no Bear Sterns”. While discussing Merrill Lynch an analyst on the Faber Report stated, “Will Merrill Lynch need to raise capital—no!” Bank of America now owns Merrill Lynch—because Merrill Lynch ran out of capital! Jim Cramer again offered his useless advice when he stated, “Bank of America is now the Cheapest and the Best—Bank of America is going up to 60 in a heartbeat!” Two months later Bank of America is trading at 7 dollars. (2)
Whether lucky, exceptionally intelligent, or simply prophetic, a very select group of individuals did predict the gravity of the economic meltdown—one of which is Meredith Whitney. According to CNNmoney:
Whitney's rise to prominence began last October when she dropped jaws from New York to London with her audacious (yet spot on) prediction that Citigroup (C, Fortune 500) would be forced to cut its dividend to prop up its leaky balance sheet. She followed that call with forecasts of more losses and write-downs at the likes of Bank of America (BAC, Fortune 500), Lehman Brothers (LEH, Fortune 500), and UBS (3)
At a time in which many financial advisors and economic forecasters were seeing light at the end of the tunnel, Whitney stated, “It feels like I'm at the epicenter of the biggest financial crisis in history.” An ex Citigroup executive asked, "What do you do when your biggest tormentor keeps being right? You got to give it to her - she figured it out." Portfolio Magazine described her approach to financial reporting as very rational and simplistic, “Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they’d fetch in a fire sale.” In retrospect, it is clear Meredith Whitney stood as a beacon of intelligence above the massive amounts of useless information provided by other financial advisors and traditionally credible financial institutions.
The stock market can be incredibly intimidating. Fundamental investment guidelines and “fool-proof” information is hard to come by, as most advice is relative. This is why many casual traders turn to investment advice from “experts”. However, many of these experts face external pressure and ulterior motives that can skew their opinions. For example, Enron once told Merrill Lynch that if it wanted to underwrite their offerings, it would need to tell certain financial advisors within its company to upgrade Enron’s rating. Since Merrill Lynch received about a 10 million dollar fee to underwrite Enron, they complied. (4) Less corrupt advisors often talk-up certain companies because they are invested in them—they act more as cheerleaders then analysts. The SEC requires all analysts to disclose whether they are financially invested in companies. As a good rule of thumb, it is normally beneficial to use analysts that are “independent”.
For accurate financial expertise, there are a few places that are generally held in high regard. The Hulbert Financial Digests chronicles the advice of different investment newsletters and then ranks how an individual would do financially if they had strictly followed this advice. Over the past 25 years, The Value Line Investment Survey has been the top ranking investment newsletter. Another resource that ranks investment advice is Forbes.com—which ranks “stock-picking” advice every year. (Meredith Whitney ranked second in 2008). An additional problem for many amateur investors is that they simply do not do they research. If investors do quality research in the stocks they invest in, they are less likely to be fooled by bad investment advice by untrustworthy investment advisors.
1. Lynch, Peter. Scribd. [Online] http://www.scribd.com/doc/180330/Famous-Investing-Quotes.
2. Cramer, Jim. The Daily Show With Jon Stewart. [interv.] Jon Stewart. March 12, 2009.
3. Birger, Jon. The woman who called Wall Street's meltdown. CNNmoney. [Online] August 6, 2008. [Cited: April 4, 2009.] http://money.cnn.com/2008/08/04/magazines/fortune/whitney_feature.fortune/index.htm.
4. Walton, Dave. Executive Partner in law firm that represented shareholders in 2001 Enron case. April 4, 2009.
Who should investors/consumers go to for advice right now when it seems that no consumerists advice has worked in the past 6 months?
One of the big reasons that it is hard to find good financial advice during this current crisis is because most people have never seen a market turn of this magnitude in their lifetime; however, even in times of economic trouble there should be sound economic principles that one can use to assure the protection and increase of assets and net worth. The problem is cutting through the bad advice and advisors to really find someone who has a consistent record of using principles that work and who really work for you and are not trying to sell you something. It’s important to find the right advice because whether times are good or bad one should always be considering the best place to put their money and it becomes even more critical in difficult economic times because it is easier to lose that money. That explains the importance in seeking, finding, and researching what people really know what they are talking about and are looking out for your interest.
The key is finding sources that do not have ulterior motives when giving you advice. Some brokers or advisors are paid on commission of different products they can get you to invest in and most likely will push those products when really it is not in your best interest to put your hard earned money into those types of investments. It is best to look for someone who is paid on a fee basis or hourly basis so that they have no other motives than helping you make the best decision for your money, because if they can’t you’ll take your business elsewhere. Look for someone who practices what they preach and not just what they “think” is a good idea.
Some of the best advice that I can usually find on the internet comes from non-biased sources such as MSN.MONEY which I have found to be excellent on a broad variety of topics. There are some personal opinions on the different ways to invest but on the whole the advice is more un-biased than other sources. Other services could be brokerages that have free advice in articles on their websites such as Charles Schwab. Forbes is also a good source of information but may be hard to separate the good from the bad information on your own, as well as the Wall Street Journal.
MSN.MONEY is my favorite because they have something for everyone. They have simple tips for the small investor on just how to save money and tips on what not to do with your money like co-signing for a loan. They also have many articles about the market and what’s working and what’s not. Their rating system on stocks has a good proven track record. So whatever type of advice you’re looking for you should find something there. Also advice that I found is to find a mentor that has been successful before and take advice from them. The longer they’ve been investing the better because they know what works when times are good and when times are bad. Also, advice from financial planners on a fee basis can be advantageous because you don’t have to sort through the information. CPAs can also be a great source of information when looking for financial advice but always ask them for examples of what they’ve advised that’s been successful, have them prove they have a good track record. Always remember to check that whatever advice you receive and used is something that has a high probability of being good and not just something that worked for someone one time. Find people who have been educated in finances and who have experience to back up the knowledge they are giving you.
Why does trying to time the market seem to never work? Is there any possible way to know how the market will perform in the short run?
The topic I was assigned was a two part question. (1) “Why does trying to time the market seem to never work?” (2) “Is there any possible way to know how the market will perform in the short run?”
To begin, I will answer the first question. According to an article, timing the market is likened to hopping between busy lines in a grocery store and trying to get into the shortest one; but no matter what, you end up waiting the longest*. Market timing is a strategy used to make buying and selling decisions by trying to predict how market prices will move. Although many tools are out there to aid people in predicting when a stock is ready to break out of a trading range, timing the market generally fails because you are attempting to predict the future. Realistically, no one can do this. When a trend suggests something good is about to happened, a catastrophe can sporadically occur that will send the market spiraling, especially in today’s economic crisis. The effect can work the other way around as well. Something amazing can happen as you sit there sucking your thumb expecting the market to do poorly. Although there are quite a few out there who have been able to benefit from this method, you need to realize that it is ultimately a gamble, and nothing is ever 100%.
Moving onto the second question, I ask that you briefly bear with me for a bit as I use an example to relate a card game and market timing. In the popular card game known as “Blackjack” or “21”, players have been known to utilize a method to attempt to gain an advantage over the house. This method is called card-counting and it uses basic math and statistics to predict the probability the dealer will go over the limit. Counters mathematically remember what has happened in the past to better understand what cards will emerge in the future. Using this knowledge, they fluctuate their bets up and down. Just like the card-counters, market timers are gamblers and use various economic indicators and data to predict what the market will do.
The answer to the second question is no. You cannot know how the market will perform in the short run; however, you can get a general understanding of what will most likely happen. The thing to realize is that you cannot know anything for sure and that these aren’t dime chips in a casino; this is real money being handled in a real market. In economic times such as these, there are two extremes to money management. People will either be ultra conservative while others are more than willing to gamble and get more money out of the market.
For the gamblers, there are predictors out there that can be utilized. It takes a lot of time to study and truly understand the data and trends. Even if you do have a solid grip on what the market does, it is never 100%. Anything in this world can happen. Remember market timing is unsafe. Here are some resources for market indicators and historical data:
Since you can’t truly know what the market will do in the short run, my suggestion is to avoid making a quick buck. Stay in the market for the long haul and ride it out. Avoid trying to get into the game of market timing. Also, that example of card-counting I used earlier, don’t do that either. It’s not smart.
Here is a small excerpt from an article explaining the importance of “time in the market” rather than “timing the market”:
“It's not timing the market that's key, but rather the amount of time you're in the market. Using data from Bloomberg, American Century Investments looked at the period from 1990 to 2005 and found that a $10,000 investment would have grown to $51,354 had you just sat tight from beginning to end. However, if you had missed the best 10 days in that 15-year period, your returns would have dwindled to $31,994; if you had missed the best 30 days, you'd be looking at a mere $15,730…..Whether it's maneuvering your shopping cart to the express lane or building your portfolio for a secure financial future, needless lane changing will only slow you down. Being in the game when your stocks make their move will get you to the front of the line faster.”*
Here are other resources you can use to understand the preference of prolonged time in the market. Remember, I suggest avoiding timing the market because you cannot truly know what it will do or when it will do it. Even if you think you’re the next Warren Buffett, that whole game is based on chance. Happy reading: