Stocks have been dead money for a year. Forget about making a return, most people would be happy to break even. These are times when small investors discover that your fund manager and brokerage get their fees even when you don’t make any money. When markets are sunny that small one to two percent nibble is hardly noticeable. When markets are flat the nibble becomes a bite and it hurts.
While it’s tempting to bail out of the market at times like these, that’s a poor strategy. If you’re not invested somewhere, your cash is constantly losing value to inflation. Two percent inflation doesn’t sound like much but, over time, that small chisel can chip away at the buying power of your cash. The quest is then to keep enough cash on hand to cover an emergency but not so much that inflation can chip away at your savings. It’s a tricky balancing act and here are some tips for long-term investing success.
Stay Invested
Just leaving your cash in the bank is a loser because of inflation. To beat inflation, you need to invest your money. The S&P 500 averages between eight to ten percent returns over a long period of time. But that figure is misleading as both gains and losses tend to come in very narrow windows. That means that, over time, there are many flat years, like this one. I totally get not liking paying fees during down and flat years but the alternative is to try timing the market and the road to financial ruin is paved with the bodies of people who thought they were smarter than the market.
Diversify
Too many small investors have all their investment eggs in one basket. For many that’s an employer match 401(k), which, if not tended regularly, probably means most people are over-weighted in stocks. Ideally you’ll only keep about five percent of your wealth in cash with the rest divided between stocks, bonds and hard assets. If you’re in your twenties, you might have as much as eighty percent of your money in stocks. That percentage should be reduced as you age but, what tends to happen, is people set up their 401(k) when they’re young and then forget about it. Periodic adjustments to bring your asset mix in line with your age, a process called rebalancing, is necessary to keep from being overweight in stocks.
Invest In Hard Assets
Hard assets, things of solid, tangible value, are the best way to preserve the buying power of your cash into the future. Solid things have a certain intrinsic value which will float along with the buying power of currency. Hard assets like income producing property, not only maintain the buying power of currency, they bring in cash. The only downside to income producing property is that it’s not a liquid asset, meaning that it cannot be easily converted to cash. An example of a liquid hard asset would be high quality gold and silver bullion. Gold and Silver Eagles from the U.S. Mint are widely recognized and accepted bullion products that are easily converted to cash. Gold offers the further advantage of preserving the buying power of your currency. Gold is not only immune to inflation, gold thrives in an inflationary environment.
The biggest key to protecting your cash in today’s crazy markets is not to try to be smarter than the markets. Diversify, rebalance and keep at least some of your wealth in high quality hard assets. That way a part of your wealth is positioned to win no matter which way markets move.