Greed Kills Financial Plans

Today, the Dow Jones Industrial Average fell 358 points, and, at 18.5% below its all time high, is close to bear market territory (defined as a 20% drop). Bonds haven't done well, either, as rising inflation and credit concerns (in the case of corporate bonds) have taken their toll. Foreign stock markets have been dropping, most notably the Indian and Chinese markets that popped so aggressively last year. It seems like almost all standard investments are dogs. What's an investor to do?

Commodities like gold and silver beckon, while oil sings its siren song. But commodities have been on a long boom, and we now know from lessons administered by the real estate market that no boom goes on forever. Over the next 30 years, oil prices will surely rise. But over the next 2 or 3 years, they could fall. Gold and silver are default investments, where people go when nothing else seems attractive. They have limited underlying value, and, as long term investments, haven't kept pace with inflation over the decades. Beware the glitter of precious metals.

Now is the season for snake oil salesmen. They emerge from dark places to tell you what you want to hear. You'll be offered disarmingly simple investments in prime bank notes. Or you'll have the opportunity to invest in technology that turns coal into natural gas, or perhaps sure-fire leases in Latin American real estate.

Maybe you're knowledgeable enough to avoid ostrich farm-type investment opportunties. But can you resist money market-like investments that pay more than money market funds but are said to be as safe? (Many thousands bought into auction rate securities, and have found their money frozen.) How about investments that are guaranteed not to lose money, and may rise if the stock market rises? (Some variable annuities offer these features, only with very steep fees and nasty early redemption charges that may well push the upside below stock market averages.) Did you invest in the stock of banks, brokerage firms and other financial services companies, which did quite well as long as the real estate market kept rising?

What we now see in the financial markets is the risk part of risk and reward. The two go hand in hand. You can't turn a profit all the time, except by accepting the low returns of bank CDs, money market funds and U.S. Treasury securities. Avoid stretching for yield when the investment stretches credulity. Ride out the current downturn. Invest for the long term and you're likely to be rewarded. Be shortsighted, and suffer the consequences. Greed kills financial plans.