Stocks Actually Might Be Your Safest Investment Right Now

by Jeff Reeves | June 4, 2012 6:00 am

Stocks Actually Might Be Your Safest Investment Right Now

OK, let’s admit that Wall Street is a scary place these days. Here are just a few of the ugly headlines:

In fact, to be completely aboveboard, I must admit that I just weighed in myself about 5 signs indicating we’ll see an ugly summer for stocks[3].

But beyond the macroeconomic news that’s causing investors to fret and the short-term challenges the market faces, the bottom line is that anyone with money to spare has to put it somewhere. And of all the places to put it, the stock market is as good as any.

That’s not because stocks are particularly appealing right now, of course. It’s just because the alternatives are much, much worse.

Take a look for yourself:

CDs: The best rate on a five-year jumbo CD — that is, a minimum deposit of $100,000 — is a meager 1.75% as of this writing, according to BankRate.com. That’s not even keeping pace with April’s 2.3% rate of inflation, and it ties up your money for five long years. If you’re investing a smaller amount of cash or for a shorter holding period, the returns are even worse. The daily overnight average for a one-year CD is just 0.71% right now.

Treasury Bonds: Rates are near all-time lows, at roughly 1.5% for a 10-year note as of this writing.

High-Yield Savings: Bankrate.com posts even worse numbers for the more liquid high-yield money market accounts as compared with Treasurys or CDs. We’re talking 1.05% with $50,000 up front to get in the door.

Annuities: These investments have come back into fashion, but many investors don’t truly understand them or the variety of “flavors” in which they’re offered. In a nutshell, you pay a lump sum or a series of payments and then the provider makes periodic disbursements back to you for the rest of your life. Sounds decent as long as you don’t die early, right? Except the complications — including tax penalties, “surrender charges” and other fine print — make these investments quite challenging and can tie up your capital for years or even decades. And even then, the typical fixed-rate annuity — the “safest” version of this investment — yields only 2% to 4%.

Investment-Grade Corporate Bonds: These bonds are cruising around 3.3% yield[4] on average. That’s near lows not seen since 1973. At least you’re beating the rate of inflation here … but not by much. And if you’re planning on dabbling in bonds via ETFs or expect to sell before maturity on the secondary markets, you risk losing out big-time if you sell at the wrong time despite that yield.

High-Yield Bonds: These investments are referred to as “junk” for a reason. That’s because companies that offer higher yields on their debt do so because they have dodgier credit ratings and need to prod investors into taking on greater risk. Junk bonds are yielding an average of over 7% as of this writing — but again, those who invest in high-yield funds or play the secondary market could take a bath when it comes time to sell. That could offset the juicy yield made in the interim. And, of course, there’s the risk that the shaky companies offering these bonds may default and never pay up. Considering the massive redemption in high-yield bond funds recently[5], these risks are crucial to consider.

Gold: It’s mistakenly labeled “a store of value.” It’s just as volatile — if not more so — than other speculative investments. Consider that the precious metal is currently near its 2012 low, off 19% in less than a year. Consider that in 1980, gold fell over 40% from its peak in just three months. Yes, goldbugs like to cite the fact that gold has almost doubled since 2009, while the market is up less than 40%. But this is an extremely volatile and risky investment class, and those who ignore this fact do so at their peril.

Currencies: Don’t make me laugh. You need a crystal ball to figure out how this is going to work out with the euro on the brink of disappearing and the U.S. set for another debt ceiling debacle. The stock market has the security of Fort Knox by comparison.

So I have to ask: If you don’t like stocks … what do you like?

Are you willing to let inflation bleed your dry?

Are you building a Doomsday bunker and stocking up on ammo and canned goods?

Because if you live in the real world, the harsh reality is that there aren’t a lot of other alternatives to stocks right now. It may not be pretty, but there it is.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[6] Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP.

Endnotes:
  1. it could already be in “recession”: http://www.theatlantic.com/business/archive/2012/05/5-reasons-china-might-already-be-in-a-recession/257636/
  2. job growth anemic: http://investorplace.com/2012/06/may-jobs-miss-forecast-unemployment-rises-to-8-2/
  3. 5 signs indicating we’ll see an ugly summer for stocks: http://investorplace.com/2012/05/5-signs-of-an-ugly-summer-for-stocks/
  4. 3.3% yield: http://www.foxbusiness.com/2012/05/02/corporate-bond-issuance-in-us-roars-back-to-life-uk-dominates/
  5. the massive redemption in high-yield bond funds recently: http://www.reuters.com/article/2012/05/24/investing-fundflows-lipper-idUSL1E8GOOEP20120524
  6. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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