3 Places NOT to Put Money Now

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In the post 3 Places to Put Money Now, I suggested stocks and real estate as appropriate investments for an economy that’s starting to emerge from the woods. The third suggestion — paying off debt — is always a great idea.

Now it’s time to see what investments you might want to stay away from.

Note, however, that behind these ideas is my belief that the economy is getting better: if you don’t agree and think that it’s getting worse, this is advice you’ll want to ignore.

Investment to Avoid: Long-term bonds

In the video new story above, I attempted to illustrate how bonds move in relation to long term interest rates by using a seesaw. On one end you have interest rates, on the other bond prices. So when interest rates go up, bond prices go down, and vice-versa. The longer the term of the bonds – that is, the longer it will be until the bonds mature – the more pronounced the swings.

If the economy is truly picking up steam, then the path of least resistance for interest rates is up. That’s why I’m counseling to avoid long-term bonds and long-term bond mutual funds: because if interest rates go up, bonds could get hammered.

In a recent article called Stop gobbling up bonds — they’re risky!, Money Magazine agreed. And so did this article from Forbes, saying in part…

Interest rates are at their lowest levels since the 1950s. Investors who grasp for that last percentage point of yield and buy long-term bonds are making a gigantic bet that rates will fall even further or at least hold even. Anything else will expose them to serious losses, as happened in the late 1970s. Long-term rates spiked past 13% by 1980, halving the value of some supposedly conservative bond portfolios.

So if you have a long-term bond mutual fund through your 401(k) or elsewhere, be aware of rising interest rates. I’m not suggesting that rates will rise suddenly or severely. Major interest rate increases are still months – if not years – away. Nor am I suggesting that you shouldn’t ever own bond funds: they can be appropriate for part of a conservative investment mix. But bonds are investments that shine in falling rate environments: That’s probably behind us.

Investment to Avoid: Long term Certificates of Deposit

You avoid bonds when interest rates are rising because they can fall in value. You avoid long-term CDs because of opportunity cost.

If rates do begin to rise, the last thing you want is have all your money locked up in a long-term certificate of deposit that doesn’t allow you to take advantage of higher yields. The time to lock in interest rates is when they’re peaking and expected to fall, not when they’re at historic lows and expected to rise.

That being said, there’s nothing wrong with spreading your savings around in various maturities, like money market accounts, short-term, and longer-term CDs. Then you’re prepared no matter what happens to rates. If they rise, your money market immediately pays more. If they fall, you’ve got a higher rate locked in with long-term CDs.

Investment to Avoid: Gold

In a recent article called Gold is a bubble – resist its charms, CNN/Money makes the case that gold is over-priced and due for a fall. Gold has nearly tripled over the last five years – this is a party that could soon be winding down.

From that article…

“When the economy moves from recession to prosperity, there will be little reason to own gold,” says Mark T. Williams, who teaches risk management at Boston University. “And speculators will learn the hard way that gold in times of financial stability is hazardous to investor health.”

As I suggested in the video above, behind the speculative fever that’s driven gold to historic highs is a fear of runaway inflation, global economic Armageddon and other nightmare scenarios. As an improving world economy helps dissolve some of these fears, the need to own gold will decrease, and perhaps, so will prices.

I own some gold in my portfolio, and will probably continue to, at least for the near future. But gold is in a bubble: sooner or later the music will stop – don’t be the last one standing.

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Comments & discussion

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  • http://www.moldremovalcenter.com Mold Removal

    Good call on gold! If you were lucky enough to get into gold 6 or so years ago then good for you. If not, don’t do it. Not only does gold look to be topped out…but the fees associated with selling it are very high. 10% of the value of the transaction on both sides! If you’re bullish on gold buy gold mining or equipment stocks. At least there’s a liquid market for those. Good luck.

    • http://pulse.yahoo.com/_JK3EJD4UE3YIAIJFUNJIAPLXQU AMTM

      To most, physical and paper gold are the same..they aren’t..Once you realize the distinction why would anyone in their right mind look to sell actual physical gold?…because they economy is humming along? green shoots to recovery?

    • http://pulse.yahoo.com/_4T32URESA4LUVN6LQ4DEYJFY3A Michael

      How was it a “good call” when gold has gone up over 33% since this was written?  And that is WHILE the COMEX keeps raising margins to fight the price down.

  • Anonymous

    I’m definitely out of long-term bonds. Still have a fund with short-term bonds (under 3 years).

    Not sure on gold. I’m looking at this pullback as an opportunity to trickle a bit more in, but mostly interested in silver. The fundamentals for gold haven’t changed, IMHO, and silver is even stronger given all the industrial consumption which has eliminated the surplus from hundreds or thousands of years of production just in the last 50 years.

    As for 5 year CDs, I just picked up another last week for my “insured cash” portion. Rates for a shorter term are too low to bother with, and I found 5yr CDs with only a 60 day interest penalty if I break them early. That way if interest rates do go sharply up (l had CDs in the 70’s and 80’s also) I can break a CD at little cost for a new one at the higher rate. I prefer i-Bonds, but I’m not locking up any money there for a 0% premium over the CPI inflation.

    (that CD is with Ally Bank, formerly GMAC Bank, and fully FDIC insured)

  • http://pulse.yahoo.com/_R6READ4TRHBCZ4BZ6AH2CRI3XM Mickey

    About 5-year CDs: if the penalty is minimal, it’s often advantageous to get one even if you only intend to keep it for one year. At my Credit Union [check one out -membership requirements are often easily met], I get 2% annual interest on a 5-yr CD [a 1-yr CD is less than 1%]. There’s a 3 month interest penalty for cashing it in before it matures. So if you cash it in after 1 year, you still get 1.5% interest (9/12 x 2%). In 2 years, about 1.75% interest, etc. There’s no rule at the credit union to keep me from cashing one in and immediately setting up a new one if the rates rise enough to make it worthwhile.

    I asked why they allowed that and was told it’s to encourage people to plan to keep their CD’s as long a possible, so they set up only a small penalty. What a BIG attitude difference from the banks! I recently joined that credit union because I was tired of M&T nickel-and-diming me. What a pleasant surprise.

    As I said, check out a local credit union. I’ve never worked for the state government, but I found I qualified to join SECU, the State Employees Credit Union (of Maryland), because I’m a graduate of a state public college! Having a relative who is a member would have worked as well. It has branches near me and across the state. It has more ATMs than M&T and is part of a no-fee network of 60,000 ATMs nationwide as well as in the UK and Australia! Free checks, no debit card swipe fees, no charge for covering checking account overdrafts if there’s enough in your savings account, a higher interest rate on checking accounts than on M&T’s savings accounts, etc.

  • http://pulse.yahoo.com/_YMW5774QWPDTWO7ETTYHL3JLLY Anonymous

    About one year ago, I tied up some of my money in a 5-year CD which paid 4%. I am really glad I did that, contrary to the advice I read regarding not tying up funds in long-term CDs. Since then, interest rates have continued to fall and it is hard to find even 3% for five-year CDs. Recently, I was fortunate enough to find a 10-year CD that paid 5% with a credit union and I purchased that. If interest rates rise sufficiently, I will pay the six month interest penalty and get out of the CD. My feeling is that Ben Bernanke and company will continue to keep rates low for a long time, although I strongly feel this is a wrong strategy on their part,

  • http://pulse.yahoo.com/_JK3EJD4UE3YIAIJFUNJIAPLXQU AMTM

    There’s contango and backwardation in PMs, silver in particular. That equals break out. There also seems to be a large normalcy bias right now..A desire for things to go back to normal. Let me tell you: with Genocidal Ben at the helm countries that include food and energy in their “core” CPI will be revoltin’ like crazy. “memba commodities are priced in reserve currency….what’s Gen Ben doin’ folks..all sides know about QE and its effect..connect the dots ladies and gentleman..connect the dots!

  • http://pulse.yahoo.com/_FUUHVEHDT2DR5PZJ6DRXLH6KSI Linda B

    It’s worth noting that this article is about what not to do NOW, i.e. timely advise, tied to when it was written. He isn’t saying never to anything or even Sell, Sell, Sell! I also own some gold, both ETFs and funds, which I am holding, as well as some LONG term CDs that I laddered at over 5-6% each at Discover Bank (not an endorsement, just the best rate at the time!). It is all a matter of when you get into things and when you get out. I, too, think real estate will turn around eventually, and own some real estate funds I recently purchased, but have to ride the roller coaster out to the end to see what happens, as they are down, right now. I have enough things in my portfolio doing well right now I don’t worry too much. But, stay tuned folks, as NOW changes often and what might be great now or to be avoided now could flip flop. I recently discovered the joy of high paying dividend stocks and funds, some I bought without even realizing they paid high dividends, and some of which havent’ really done all that well. But I have been surprised and pleased at seeing those little deposits into my account, then reinvested add up and balance out my losses in other areas.

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    I really adore what you had to say. Keep going because you definitely bring a new voice to this subject.

  • http://pulse.yahoo.com/_NCRD6DCG2UTJJVXMV56VCBN6NY Sam

    If anyone could say exactly what gold is going to do, they would — indeed — be very rich. A little silver and gold make for a more balanced portfolio.  Gold, indeed drops in good times – we may go through some more bad before we get to good. 

  • http://pulse.yahoo.com/_R46QLM6RI4Z7XXCODV4PQX5AZU Wayne

    When this guy wrote this piece, on 24 January, gold was at 1340. I’m feeling really foolish having bought two years ago at 1000 and now seeing 1666 last and sure to rise on Monday. And if Faber is right and the Bernank shows that he is not just an amateur money printer…then I’ll continue to hold something that has no counterparty risk.

    Seriosuly, Stacy Johnson, do you see nothing but sunshine in the economy? All I’m seeing are dark clouds. FAZ, VXX, and shorting several companies (I’m looking at you BAC) has made me some fiat. You are certainly right about long term CDs and bonds. With the US downgrade, we won’t be able to keep ZIRP forever. Wait for a better yield in the coming months and years before tying yourself up.

  • http://profiles.google.com/spamthaman spank man

    WHERE WAS THE BUBBLE THIS WEEK ?

  • http://www.facebook.com/people/Jake-Blanton/100001675138371 Jake Blanton

    I have one stock that has earned me $75K over the last year… I’m not going to say what it is so that no one can accuse me of pumping a particular stock… I’m just going to gloat a bit…Sorry…

  • http://pulse.yahoo.com/_TBQK7EV3PM2ZFTPMY6EWE7SPXY clark

    This is why you don’t waste your time with so called pundits