Marc Cuniberti A question I often get asked by people with a limited amount of income and a relatively small amount of savings is should they be in the stock market in hopes of growing the nest egg.
The answer is not a slam dunk yes or no, and there are exceptions, but more often than not, I usually answer a resounding no, you should not be in the market.
My first consideration is that a relatively small nest egg is the only barrier between living comfortably and a spot in line at the food bank.
Sure, one could lose their egg entirely and may still be able to afford their living expenses from their income, but a hiccup in that area and into the shelters you go. Once you fall into that cycle, it’s hard to get out. Just ask anyone who’s been there.
Stocks obviously can go down as bad news can crater a stock price as well as a dozen other things that can go awry to reduce a portfolio balance.
I know the proponents of being in the market at all costs may not agree with me when I suggest staying out of stocks, but there is no denying that stocks can go up (why we are there), but can also go down (why we may not want to be there).
That’s not to say there are no exceptions or options for the low net worth investor. A person of a younger age would certainly want to consider investing in stocks. In fact, I recommend that, barring some specific circumstances. One should start investing in the markets from an early age. It is how fortunes are made, and the earlier you start, the better off you will probably be.
If one has an inheritance coming, a stock portfolio might also be a consideration seeing as a potential bailout fund might be in one’s future.
A good paying and secure position of employment would also be a factor, although the former is easily determined while the latter is subjective.
There are circumstances that would strengthen the argument against owning stocks. Having dependents or obligations that might require some or all of what little funds one may have available would give good reason to avoid stock market risk. Keep in mind, with the financial buffer that cash savings provide, an unexpected expense to someone who plowed all their savings in the market could force an untimely sell when stock prices are down.
There are options for risk averse persons in lieu of sitting on a bag of cash or dabbling in stocks.
Fixed indexed annuities are structured to allow participation in up markets but not down ones. These products may not mirror all of the market gains exactly however, as the issuing company of the annuity usually takes a chunk to compensate them for taking the downside risk. But at least you might get something.
A Guaranteed annuity won’t invest in the market but instead just pay a flat interest rate which may be higher than the going rate in a savings account or CD. The annuity may also freeze that rate for a period of years. Nice to know considering the high rates of today might not stay that way. Some annuities may also allow the participant to withdraw a certain amount of funds if needed without penalty. Nice to know if an emergency strikes.
As always, make sure you completely understand the terms of whatever it is you are considering to avoid getting tied up in an illiquid situation.
For those wishing a government guarantee instead of the insurance company guarantee of an annuity, Treasuries, which is debt from the U.S. government, are currently paying rates approaching 6% APR. Treasuries are backed by the full faith and credit of Uncle Sam. Be aware however, that interest rates have been moving rapidly in recent months, and when interest rates move significantly, they can have a serious effect on short term investments and the stock market in general. And as always, seek out a financial professional if you need assistance with your investing needs.
“Watching the markets so you don’t have to”
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249 His insurance agency is BAP INC. insurance services. Email: [email protected]
