Hard to believe that we are already nearing the end of January. Research shows that 80% of New Year’s resolutions fail by the second week of February. If one of your goals was to start investing, you’ve still got time to make good on your resolution.
But isn’t recession just around the corner? Why should I invest now?
There have been plenty of studies that suggest that trying to “time” the market over the long run does not work, and that a majority of actively managed funds do not outperform the general market. Basically, you’ll probably be worse off trying to time it than you would be simply investing incrementally over time, without too much consideration regarding whether the market is up or down. With that in mind, it is generally most prudent for individual investors to invest consistently and incrementally over the long haul (much in the same way that one would contribute to their 401k).
Current market conditions are pointing to a slowing global economy. For example, we see a Chinese economy slowing more quickly than anticipated, a slowing US housing market, and continued yield curve inversion. All of this points to what seems like the end of a decade-long bull run. The market may very well enter its first real bear market in a long time over the next 12-18 months. On the other hand, plenty of pundits have expressed their fears of recession for years now, meaning they have been wrong. For years.
So will the market continue to go up and to the right in the near term? It’s hard to say. But it’s certainly worth investing over the long haul, considering the total market tends to double every 7-8 years.
With all of this in mind, here are 5 ways to invest in the market in 2019:
1. Money market funds
The ultimate “safe” investment - most money market funds have very little fluctuation, and you can essentially be guaranteed that you won’t end up with a net loss (especially when taking into consideration a current yield of ~2.35% net of fees). Basically like “putting it in the bank”, but better. Money market funds and high yield savings accounts are both great options for those that are afraid of sustaining any losses. If you have any major upcoming expenses, it may be wise to keep a good amount of your cash parked here.
2. Treasuries & bonds
These debt instruments can range from guaranteed by the US government to junk rating. I am hesitant to allocate any investment to bonds due to the current level of corporate debt, continued interest rate risk with yield curve inversion, and confusion surrounding the Fed’s direction. For a yield between 2-3%, I would prefer a money market fund, because it is more liquid and not subject to the same interest rate risk as treasuries. High yield bond ETFs are certainly an option, but there is increased risk from potential corporate default (a certain utility company headquartered in California comes to mind).
3. P2P lending
Peer-to-peer lending gained a lot of traction over the past few years, but many have reported that they have seen a higher percentage defaults and lower overall yield, despite maintaining the same parameters and screening. Getting a higher yield requires loaning to individuals with a riskier credit profile. It’s like loaning a lot of money to that friend that never pays you back. If you get burned, you really can’t act too surprised. I cannot verify these claims from others’ experience with P2P lending, but a glance at other personal finance blogs indicates that the risk-to-reward ratio doesn’t justify investing through P2P lending vs. the other alternatives that are out there.
4. Dividend ETFs
Dividends will be a fantastic way to grow cash flow and overall portfolio, even in a relatively weak market. It’s a gift that keeps on giving. I’ve written before about the great benefits from dividend investing, and I will definitely look to increase my dividend positions this year.
5. Total market ETFs
The market is currently down over 11% from its all time high in September 2018. With a longer investing timeline, this is almost certainly the best way to go. Again, as mentioned many times prior, the market tends to double every 7-8 years, including recessions. With a longer timeline, investing in total market ETFs like ITOT, SPTM, VTI, and SCHB are all great long term bets, because the US economy continues to grow. At current levels, I still think these ETFs are wise investments - even more so if the market drops. However, I will decrease my allocation of new funds to these ETFs moving forward, as I have some large cash needs in the pipeline. Because I know for a fact that I will need the cash, it’s a bit more prudent to keep it in MMFs than to have significant exposure to the total market.
We may still be in for a rocky ride in 2019, but don’t let that deter you from getting your feet wet in investing. Leave a comment about your own investing strategy for 2019 - would love to hear your thoughts as well.