Where should you invest today as the stock market reaches new highs and vehicles like bitcoin sky rocket? Are you into market timing or long term investment? Either way the best advice comes from legendary investor, Warren Buffett. His two rules for investment are these. Rule one: Do not lose money. Rule two: Remember rule number one! If you have made some money in the market in the last few years or if you have sat on the sidelines and want to get in, what are some safe investment options today?
The Promise of Trump or Not
The shock of Trump winning the presidency wore off very fast and a market that tanked overnight has grown steadily ever since. Pundits have assumed that the promise of Trump to lower taxes, deregulate, bring offshore corporate cash back home and stimulate the economy with massive infrastructure spending have been the drivers of the market. But very little of the Trump promise has come to pass. Bloomberg writes that Trump policies have done nothing for stocks and it has been strong corporate earnings that have sustained the market rally.
Decomposing stock returns over the last year, our analysis shows that earnings growth is responsible for most of the appreciation in equities. While analysts assessed the potential impact on earnings from potential corporate tax changes, the recovery in corporate earnings was underway well before the election. The S&P 500 has posted an average gain of 1.6 percent a month over the last 12 months. The contribution from earnings has been 1.5 percent on average a month. Treasury yields have climbed, acting as a drag on stock prices. However, this drag has been largely offset by a lower risk premium. That’s not especially surprising given stronger investor optimism.
If earnings are the key to stock market performance the question is how long will earnings last? And what happens when the economy slows and earnings drop? The Trump administration and Republicans say that a healthy tax cut will drive economic growth higher but most economists disagree with Republicans.
Assuming that earnings drive the value of investments what are some safe investment options today? Take a look at our article about how to invest $10,000. Please note that we suggest that you first pay off credit card debt and put enough money to pay the bills for several months in the bank. Then considering buying your own home and taking advantage of the deduction on mortgage interest payments. And finally use IRAs and 401Ks to take advantage of tax deferred savings vehicles.
Investing in companies with cash is always a means of obtaining a margin of safety in a stock portfolio. A company like Microsoft has gone through its incredible growth phase and is sort of hung up the high twenties. However, it pays about a 2.5% dividend and typically has billions of dollars in cash at its disposal. This cash reserve allows a company to weather economic storms without going into bankruptcy and allows it to take advantage of potentially profitable takeover opportunities.
Since we wrote this, 7 years ago Microsoft has tripled in value and trades at more than $80 a share while paying a 2% dividend. The key to determining what is a safe long term investment is calculation of intrinsic value whether it is in stocks, real estate or bonds. And be sure to diversify in order to reduce the risk of one bad decision and increase your chances of finding the next Microsoft just at it goes public.