Tuesday, October 7, 2008

If I sell, where do I invest my money?


The question in the above headline is very important and because it is so important, I need to spend some time on the answer. The question that has to be asked is why did you invest your money in the first place? Did you invest because you needed income or did you invest for long-term growth or some of both?

Let us separate the two and look at each individually. You have a need for income as an objective. If you sold an income producing investment, what would you do with the money? Suppose you owned a preferred stock paying 7.5% yield. If you sold it today, you will loose the 7.5% cash flow. If you wanted to be safe, you could invest in ten year Treasury Bonds at 3.4%. If you had $50,000 in the 7.50% preferred you would be receiving $3,750 a year in income. On the other hand, if you sold the preferred and bought a 10-year T-Bond you would get 3.4% income or about $1,700 per year. If you needed the $3,750 per year for living expenses, switching to $1,700 means, you will be short $2,050 in income.

There are only two ways to make up the shortfall in income; reduce your expenses by $2,050 a year or start spending your principal. If you start spending your principal your income will also fall as you liquidate principal. As difficult as it may be to deal with, your need for income is more import than the price changes of the investment. You would not sell the preferred if its price went up because you need the income and you should not sell if the price is down,

If you are investing for long-term growth then the recent declines in the stock market present a buying opportunity through dollar cost averaging. The process of dollar cost averaging is investing the same amount of money in an investment regardless of the current price. By investing, the same amount each time sometimes you will buy more of the investment and sometimes you will buy less. The point is to invest on a regular basis. For readers who are dollar cost averaging now may be the best time in your lifetime to invest.

I know that it is hard to see these markets decline the way they have and in many respects, it is very scary for me, too. In the 35 years, I have been investing in the markets I have never seen such a time as I have seen in the last 30 days.

Things will not turn around over night and it will take time to rebuild the markets. I want to remind you of one very important event that is taking place in all of this turmoil. The United States dollar is skyrocketing against many of the major currencies in the world. When people get scared, there is one place they all want to get their money to, the good old USA. It is a good place for you to have your money invested, too.

Dan Perkins

No comments: