A Good Return on Patient Money
Tuesday, May 9th, 2006
By Michael Lombardi, MBA for Profit Confidential
Let’s face the facts:
With a dividend yield of 2.15% and a price/earnings ratio of 20, big stocks are not cheap. Yes, stocks have been moving up in price. And I always say the trend is your friend. Hence, I wouldn’t be shorting stocks at this point. But the value just isn’t there. Stocks are generally expensive. Eventually, I believe the 15 interest rate hikes the U.S. has experienced will catch up with the stock market.
Same story with investment real estate: With interest rates having risen so aggressively in the U.S., investors are no longer snapping up properties for investment purposes. Why buy a property with a 6% return on investment when you can purchase a six-month U.S. government guaranteed T-bill that pays 5.02%? If six months is too long for you, 90-day T-bills pay 4.87%.
And this really brings me to my point of the day. 5.02% guaranteed is a good return for patient money.
Tomorrow the U.S. Federal Reserve will raise interest rates again. Can you believe it? Tomorrow will mark the 16th time in a row the Fed has raised interest rates. As an avid investor, I can tell you those rate hikes are really taking a toll the real estate market in the U.S. The stock market hasn’t been hit yet, but it may only be a matter of time before reality sets in.
And that reality is this: American consumers can’t continue spending so aggressively with interest rates having risen so much. The U.S. dollar is so weak that medium to long-term U.S. Treasuries (the ones foreigners most buy) are offering the highest yield in four years.
My take home message is that 5% on short-term government backed paper is a good alternative for patient investors at this point in our economic cycle. Will stocks offer better value at some point down the road for value investors? Definitely. Will investment real estate offer better returns for patient money in the months and years ahead? Definitely. So why not wait it out safely for now?
Next Post: When Hot is Not?
Previous Post: The Canadian Dollar is on Fire
Tags: interest rates, stock market, U.S. dollar
Tweet
Sign Up for PROFIT CONFIDENTIAL and
receive a FREE copy of our exclusive report:
"A GOLDEN OPPORTUNITY FOR STOCK MARKET INVESTORS"
We respect your privacy and
will never share your e-mail address.
Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
