Money & Investing - Banks.com

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It’s an interesting day today on the financial markets. U.S. unemployment has breached the 10% mark, and that is driving things. However, it isn’t resulting in the rout that some might have expected on the stock market. Indeed, the Dow, Nasdaq and S&P 500 are all barely in the black, holding tenaciously to gains made yesterday.

Another interesting result has been the sky-rocketing of gold prices. Just after the unemployment announcement, gold prices surged to $1,100, a new record high. Gold is back below $1,100, at around $1,093, but gold bugs are anticipating that the news means that pressure will be on the dollar going forward, as the Fed adheres to quantitative easing measures. MarketWatch reports on interest rate expectations:

Bets that the Federal Reserve will eventually lift interest rates from near zero fell slightly after the report. Fed fund futures indicated traders pared bets the Fed would raise its target rate by mid-2010 to 0.31%, compared to a 0.33% rate before the data.

On Wednesday, the Fed left its target rate in a range of between 0% and 0.25%, and repeated its commitment to keep rates low for the foreseeable future, citing slack in the economy and little reason to worry about inflation.

Helping the stock market is the commitment by Congress to prop up the housing market by extending the first time home buyer tax credit, and expanding it so that even some current home owners can take advantage of a tax credit. The news reinforces the idea that the government plans to continue propping up the economy as much as possible.

So, while the unemployment rate remains high, there are still indications that economic recovery will roll forward, albeit slowly. As a result, it doesn’t hurt to begin thinking about how you plan to invest in an economic recovery.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

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Many investors are wary of stock market rallies right now. There is concern that unless the Dow can sustain itself above 10,000, signs of an imminent recovery aren’t good. While the truth is that it will probably be some time before a lot of the volatility smooths out and economic recovery really picks up speed, investors are nonetheless interested in Dow 10,000. And, after being below that psychologically important level for some time, it looks the bulls are making a run at it today.

Indeed, yesterday’s economic policy statement from the Fed is inspiring some hope as investors see that the Fed is willing to continue propping up Wall Street banks for a little longer. Additionally, economic data is encouraging. Jobs claims data shows that the employment picture is improving, albeit at a rather slow pace. Retail sales data from October showed an increase that was bigger than expected, and there is optimism for the holiday shopping season. And, productivity is on the rise, reports BusinessWeek:

U.S. nonfarm productivity growth rose at a torrid 9.5% clip in the third quarter, the fastest pace in six years and much higher than economists had expected. It follows a revised 6.9% rate of growth in the second quarter (from 6.6%).

“Obviously cost cutting and layoffs through the recession have kept productivity rising at very robust rates,” said Action Economics analysts in a website posting Thursday.

All of this news has the stock market in an upbeat mood, driving toward 10,000, and hoping to set the stage to break through that barrier today or tomorrow. It is important to be wary, however, since economic data isn’t that great, and economic recovery is supposed to be a slow process.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

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A few weeks ago, I reviewed the book The Complete Guide to Investing in Index Funds by Craig Baird. It is an interesting and useful book. More recently, Craig was kind enough to answer a few questions I put to him via email. Here are his answers:

1. What are some of your favorite index funds?

I wouldn’t say I have a favorite one, but I am a big fan of investment funds that match my own morals. I like the FTSE4Good U.S. Select Index because they list the companies that match environmental and human right criteria. This way you know that the index fund you are investing in, and by extension the companies, are helping to make the world a better place. As well, with the push for going green growing around the world, a lot of these companies are becoming world leaders with consumers and have nowhere to go but up. The Domini 400 Social Index is another that I like as they do not list any companies associated with alcohol, tobacco, nuclear power, the military, firearms and gambling.

2. Do you prefer index funds over ETFs?

Well both ETFs and Index Funds have similar advantages including low-risk and tax efficiency, and can be good investments but I am a bigger fan of index funds. It is argued that ETFs represent only short-term speculation, and the expense of trading decreases the return to investors when compared with index funds. Those who work with index funds feel that there is not enough diversification in ETFs when compared with index funds. I personally feel that index funds are a safer investment, especially in tough economic times.

3. Do you recommend an all-index fund portfolio?

This really has to do with the individual investor. While an all-index fund portfolio can be good because there is low-risk, but low-rewards, it may not work for everyone. If someone is in their 50s or 60s and wants to get high returns for their portfolio to fund their retirement, then they may not get the rewards they want out of index funds. However, if they already have a lot of money in their portfolio and just want to slowly add to it, then an all-index fund portfolio can work for them. Young investors may not want an all-index fund portfolio because while they have a long time to build their portfolio finances, they may want to take some higher risks because they have a greater amount of time to rebuild in the case of a bad investment. I think it is good to diversify. If you are a high-risk investor, then perhaps make only part of your portfolio focused on index funds, with the rest invested in stocks, currencies, mutual funds, etc… The really adventurous and knowledgeable investor may want some index funds, especially if they are investing in junk bonds. If you want to be conservative and just bring in a little amount of money with little risk, then perhaps an all-index fund, or nearly all index fund, portfolio may be a good fit. That all being said, you do not want to put all your eggs in one basket, even if it is index funds. I would always ensure there is diversification in any portfolio, with the amount of index fund makeup in it varying from 30 percent for high risk investors, to 80 percent for conservative investors.

4. How would you invest in a recovery?

This is a good question as a lot of people are wondering about it. Personally, and this may work for me and not others, I would invest in index funds heavily in tough times because you are not trying to beat the market with index funds, but mirror it. It is pretty much impossible (or nearly) to beat the market because all the information relating to a stock immediately affects the price of the stock, so there is no legal way of getting a jump on things, so much of it is chance. If one was to invest in stocks, then investing in the stocks of companies that traditionally do well but have lower stock prices because of the recession would be a good bet because they will go back up eventually. I would also invest in renewable energy companies. A large portion of the stimulus package created by the government is being used to create green jobs and to push renewable energy. A lot of these companies are going to see very fast growth in the coming years I think.