Don't Invest in Just the Sunny Side of the Street

People pay attention to financial products that seem to be generating current returns. Maybe that's a modern manifestation of the predator's instinct to focus on motion. In the savanna, something moving might make a good meal. Financial products that are currently paying off appear to be a more certain bet than something that's taken a tumble.

Thus it is that many investors (or at least money managers) have lately been jumping into the stock market. It's moving and appears to be providing good eating. Money managers, in particular, are measured against market indexes and don't want to appear behind the curve when quarterly results are announced.

Another product that has become more popular is the variable annuity with a guaranteed return. These annuities, for a rather large fee, promise the investor a minimum return no matter how badly the stock markets do. When the stock markets do badly, this variable annuity has its moment in the sunshine. But pay close attention to the fine print if you consider investing in one. There are significant limits on the upside potential, so you won't feel so brilliant when the stock market is rising. Insurance companies may be less generous with the terms of new annuities, because they didn't anticipate a bear market as ferocious as the recent one and some of their earlier products are turning out to be costly for them.

There are "principal-protected" mutual funds. which also look good when the Dow looks bad. But they have high fees, charges for early withdrawal and sometimes limits on your upside potential. They may be basking in the sun right now. But they won't always look so rosy.

By and large, human beings make lousy investors. It's instinctive to seek out places where there is sunlight and lots of other people have congregated. But the investment du jour, which will be sought by clamoring crowds throwing money, will probably have less upside potential than the downtrodden and disfavored. Sooner or later, today's frenetic running of the bulls shall pass, and some investors may be gored in the process.

What to invest in, then? Let us posit the one thought that Wall Street and its swarms of well-credentialed analysts would never admit: maybe there aren't any really great investments at the moment. (Since virtually all analysts on Wall Street failed to call the Big Bear of 2007-08, we'd been well-justified to think that they basically have no idea what they're talking about.) Stocks have dropped precipitously and then risen deliriously. Bipolar behavior isn't what most people want from their investments. Commodities are, on a percentage basis, even more volatile. Real estate is a tough call. In a few Sunbelt markets, it's fallen so much that it's probably a decent investment if you have a lot of cash and years to wait. But in most of America, real estate is something you should view as a place to live, not as a way to save for retirement. Frankly, plain old cash isn't a bad idea in a time when we have deflation, not inflation. Even with banks paying a couple pieces of bubble gum per month in lieu of interest, you get a positive return just by holding the stuff. While cash isn't a great long term investment, it's not a bad idea for now, until the smoke clears a bit. Otherwise, keep the portfolio well-diversified.