Finance News & Insights

Ask the Economist: Where can I safely put our money?

It depends how much risk you’re willing to take.

I really don’t think the stock market will fall much farther, though the Dow could hit 8,000, as predicted here. We’re nearly there already. It hit 9,213 on Wednesday, about 35% below its peak. That’s nearly double the expected 20% decline for a bear market, and we’re getting close to the massive stock slide of 2000-2002.

The current stock value of 9,213 was first reached in December 1997. I think we can all agree that we’ve made some economic progress in the past 11 years, with new technology and better earnings. Plus, we’ve had 36% inflation in those 11 years. That means the inflation-adjusted average stock price has plunged 36%. Stocks haven’t kept up with inflation or even a simple passbook savings account. It doesn’t seem possible they’re fairly valued at this level.

Additionally, with today’s actions by the Federal Reserve and central banks around the world, it appears policy-makers are building a Maginot Line. They’ll print money until this problem goes away, inflation be damned.

Not ready for the stock market? You’re not alone and there are less-risky alternatives. How about tax free muni bonds? Governments rarely go belly up, and they have the power to tax. Bonds from the state of Ohio will give you a yield of around 5%, according to Cumberland Advisers.

Still too risky? Consider commercial paper (short-term bonds issued by corporations) from AAA companies. Right now, mutual funds are so busy liquidating holdings, they’re dumping the corporate bonds at unbelievable prices just to get cash. Companies like GE may be trading in the stock market at half their value, but their core business is still solid, and they’ll pay you back. If Warren Buffett believes they’re solid, that’s a good indication.

Zero risk? U.S. Government bonds — but here’s the catch: the yield is 0.7%, so why bother? Inflation is at 5%. Invest for a year and your money is worth 4.3% less than it was when the year started.

In our weekly “Ask the Economist” feature, our resident Economist, Mike Donnelly, will be tackling your questions about the economy. If you’ve got a question — and no topic is too big or small — you’d like him to field, e-mail us at economist@pbp.com or leave your queries in the comments section.

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