Where Should You Put New Money?

Let us first do a quick two week high level recap. Gold closed on Friday at approximately $934, silver at $14.23 and platinum at $1215 per oz. Compared to the values on June 6th, the precious metals weakened. Dollar demand must have therefore strengthened. The long bond closed Friday at 4.52%, at a lower yield than June 6th, confirming the dollar's strength. So far, so good. The data makes sense.

But this is just a two week end to end data point. In between there was a whole bunch of news. A tug of war went on, where the market could not make up its mind: Is the economy on the mend (inflationary)? Or is recovery still quite a ways away (deflationary)? The bond prices and precious metals therefore see-sawed a little bit.

So where should we put new money?

Precious Metals or CDs?

If there is new money to invest, where should you put it? If you are building a portfolio for life, like the one I described in my June 13, 2009 post, you are likely a conservative investor and an infrequent trader. While precious metals may keep weakening, this may be a point to dollar cost average depending upon our specific situation in asset allocation, based on the formula described earlier.

However, if the portfolio was heavy by way of precious metals, investing in FDIC insured CDs was the other alternative. The best reward seems to be for 1 year timeframe (about 2.5%) to two year time frame (about 2.9%). The yield is not much higher for longer duration CDs with the five year being 3.55%. Different areas in the country perhaps have different rates.

How About Corporate Bonds?

For those with a slightly higher risk appetite, a very small portion of the cash portfolio could be invested in corporate bonds. A good one is the seven year Goldman Sachs (GS) bond. They recently sold this new issue yielding 6%. Given that Goldman Sachs returned all the TARP money, and more importantly, knowing their connection to the White House, this bond should not go bust in the next seven years. Let's not forget that Clinton tapped Robert Rubin as his Treasury chief, Bush selected Henry Paulson and now Obama has chosen Tim Geithner, all with links to Goldman Sachs.

But again, debacles happen, so a very small portion should be put in corporate bonds. The main objective is to juice up the portfolio yield a little, which is not possible by only FDIC insured CDs.

Stocks?

The US recovery is still far away, as I discussed in my earlier post. Nothing has really changed since then. In the meantime, the whole world is convinced that emerging markets will lead us out of this economic mess. The BSE (India) closed Friday at 14,521, nearly double from a 52 week low of 7697.

Similarly, China's Shanghai composite is at about 2880 up from the 1706 lows. There is a big risk that the US won't be buying as much Indian software or Chinese toys. The US has been the primary consumer in the past. Those betting on the emerging market recovery based on their own local growth may be sorely disappointed.

China's 2008 Olympics are over, and where will they want to put their money in this climate? They are already over built by way of Wal-Mart (WMT) factories. India needs to grow in infrastructure, but that is an old story and missing from that story is that no body yet knows how to make money if they invest in the infrastructure projects (too much red tape and corruption). So the emerging markets are a big bet indeed. It may not be a bad idea to stay away from these overheated markets for the time being. They are not worth the risk.

Disclosure: I own CDs, corporate bond and precious metals described in this posting

Comments

[bluesmoke:]

I'm actually parking my money in cash. The return is negligible, but given everything that has happened it seems as good as anything right now.

Jun 21 09:49 AM

[sethmcs:]

As value investor I am buying beat up regional banks FNB, FCF with 7% yields and GE. Precious metals make sense in fear (inflation) environment we are not there currently. Corporate bonds do not have tax benefits of qualifed dividends and CD don't make sense when you get a higher yield on the bank's stock.

Jun 21 11:27 AM

[StreetMedic:]

All the talk and all the huff and puff about where to put money -- what kind of time frame? A day? A week? 6 months? 10 years? 35 years? If you have a 25 year time horizon, who cares about a small percent difference between where the market sits now and where it might be in the near future. It doesn't matter what you buy. Compared to 2007, when almost nobody worried, "Where's the market going?! Where do I put new money?!" you can purchase equities at a 40% discount. Over the big picture, a hundred points on the S&P is small fry.

These are strictly defensive plays. Defense doesn't make money, just like defense doesn't win the war. You need to take risk to make money, hence the very URL of this website.

The adage in investing is that you trade the timeframe you watch. If you're a long term investor who watches streaming quotes day to day, you will trade day to day.

Here's the risk in following this advice -- poverty. May 29 to June 19th. QQQQ. Return of 3.46%. About three week period and you've made more money than an entire year in a CD.

China -- if you don't trust the US government, how can you trust the Chinese government with respect to statistics. I feel like I'm reading old Soviet era propaganda. "Industrious farmers near the Volga river grsew 10,000,000 hectares of cotton this year, enough to make clothing for 500,000 school children and soldiers."

So, where's a good place to put your money? All of the above, and then some.

Jun 21 11:17 PM