Spencer Sherman and The Cure For Money Madness

Invest In Equities

Posted on May 27th, 2009 in Investing, Money Madness, Tips

In the last few weeks the pundits are questioning the viability of investing in equities.  As a result of the financial crisis, equities and real estate are down 30-50%, while US government bonds (Treasuries) have had strong positive returns.    Furthermore, the pundits say that over the last 10 years the performance for equities is now below that of bonds.  (Keep in mind that when they speak about equities, they are speaking about the S&P 500, which is only one investment category.)

They ask:  Why take  on the additional risks of equities when you don’t even get rewarded over a longer timeframe of, say, 10 years?  Why not buy Treasuries and decrease your risk, uncertainty, and stress and still make as much money as you would in equities?

While Treasuries might appear to be the safe haven, buyer beware!

At this point in time, the expectation for Treasuries is that they will do much worse than equities in the coming years. Treasuries are also vulnerable to inflation (which is becoming a more likely possibility).  Therefore, a bond-only portfolio is far riskier than we might think.

There are two important rules in investing:

1)  Buy low, sell high. (Bonds are at an all-time high, stocks are at an all-time low.  Your choice is simple.)

2)  Diversify.  (The only people who have lost all their money have been those concentrated in just one or a few investment categories.  Diversified investors have never lost all their money.)
Can people who invest only in bonds lose everything?  Yes, it’s happened before.  In Germany in the 1920s, because of hyperinflation, bond-holders lost it all.
Bonds represent only a few of the many investment categories available in a highly diversified portfolio (like my Rainbow Portfolio).
Given all the uncertainty today and that no one can know the future, this is the most compelling time to choose a highly diversified strategy.  It is not the time to put all your money into Treasuries, or for that matter, into any one investment category.

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