Watch out – if you have money to invest for 2013 and 2014 and think you know where to invest it. If you plan on investing money in bond funds be very careful, because you may end up watching your money evaporate. Here’s why, and where you might want to consider investing for both income and growth.
Before we get into where to invest and where not to invest you need to understand something. The central bank of the USA (the FED) has employed “quantitative easing” in recent times in order to inject money into the system and stimulate the economy. They are considering doing it again by buying even more of our own longer-term debt securities called T-bonds and T-notes as well as other longer term debt obligations, or bonds. Meanwhile we still have an unemployment rate of over 8%, and a lackluster economy with a record $16 trillion in national debt.
As a result of heavy buying in these debt securities bond prices have gone up and interest rates have hit record lows – which have made bonds and bond funds a good place to invest money in recent times. Meanwhile, the credit rating for the USA’s debt was recently downgraded for the first time in modern times, and at least one major independent rating service has warned it could be downgraded further. If this happens interest rates could zoom upwards in 2013, 2014 and you better know where not to invest money.
Investing money just got more difficult, especially if you have been investing money in bonds and bond funds for higher interest income and relative safety. IF or WHEN interest rates start to climb significantly, bonds and bond funds will lose money. That’s the way it works, period. Where not to invest money now: long-term bonds and long-term bond funds. In the summer of 2012, the 30-yr U.S. Treasury bond (T-bond) was yielding less than 2 ½%. That’s a record low and hardly worth taking any risk to get when investing money. Where to invest for safety and income: short-term CDs or shorter-term bond funds and money market funds.
Where to invest for higher returns, good income and growth if interest rates start to climb: real estate in the form of real estate equity (stock) funds. These are specialty stock funds that are offered by many of the larger fund companies. As interest rates start moving back up it is likely people (including the big investors) will start to chase both low mortgage rates and low real estate prices. They won’t want to miss out on what could be the opportunity of a lifetime.
Investing money for 2013 and 2014 amounts to comparing your investment options. In a rising interest rate environment bond investing is a losing proposition. Investing more money in stocks or diversified stock funds is questionable at best, since stocks doubled in value between early 2009 and 2012. Meanwhile, real estate prices have fallen since 2007 and appeared to be on the rebound in mid-2012. Where to invest money for good income: real estate funds. Where to invest for growth and higher returns: real estate funds.
In regard to investing money in any mutual fund – don’t waste your money on sales charges and funds with high fees. Here’s where to invest at low cost: go with a large no-load fund family and work with them directly. The two biggest fund companies in the USA are Fidelity and Vanguard, and they both offer good service and funds with ZERO sales charges and lower than average fees and expenses. Go to their websites and check them out. Give them a call (toll-free). Good luck investing money for 2013 and 2014, and keep an eye on interest rates. Watch out. Bond funds in general are NOT where to invest your money if (when) interest rates turn around.