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Where Do I Invest My Cash in 2008

Credit Crunch Confusion

Where do I invest my cash in 2008?

Anyone lucky enough to have a lump sum of cash to invest this year will be forgiven for wondering where to put it. Should it be stuffed safely under the mattress? Far too risky, you might get burgled and like organic matter your cash doesn’t stand still, the longer it stays under the mattress the more it’s eroded by time as it declines in value.

How about gold? Should you join those rushing to the comfort and safety of the precious metal?

There is also the high risk and potentially high rewards offered by stocks and shares. Depending on the lump sum, property could also be considered as a place watch an investment mature nicely.

After all, you can’t go wrong with property, it always rises in value and it’s as safe as houses isn’t it? This used to be the case, but now many property markets globally appear to be imploding, while the risk of exposure to the credit crunch in emerging locations like India and Brazil is unclear.

Property aside, wherever you look there are advocates for every form of investment. Those with vested interests will inevitably spread misleading interpretations of the direction a market is heading, breeding either positive or negative sentiment. This creates uncertainty, inevitably leading to the kind of panic we are seeing now among investors. We are led to believe that house prices are crashing, gold has never been a safer bet and it would be financial suicide to invest in stocks and shares as we enter one of the stormiest global markets seen in more than a quarter of a century.

Gold spiked in 1980 only to crash to a bear market lasting until 2001. House prices crashed in the recession of the early nineties plunging unfortunate mortgage holders into negative equity. The stock market took a big hit from the dotcom bubble in 2000 resulting in ruin for many. The stock markets, gold and property have all recovered, reaching record highs in the process.

The latest global financial panic caused by the credit crunch, with accompanying apocalyptic talk of another Great Depression has now trickled into mainstream thinking.

If all this leaves you wondering where to invest your money while all this panic is taking place it is worth keeping a cool head. Capitalism is characterised by cycles of boom and bust, which act as a vital safety valve for market economies. What goes up must inevitably come down at some point. Falling house prices are blamed for the current malaise in banking sector, yet surely no one in their right minds believed that house prices would rise indefinitely. House prices in the UK and the US are at their least sustainable levels since 1989. In the UK a correction was inevitable and overdue with house price to income ratios at an all time high.

Experts in the field now advise us that it is a bad idea to invest money in a market unlikely to recover for years to come. The credit crunch will supposedly compound the situation by causing a crash of anything up to 30% in the UK’s housing market.

But as Dad’s Army’s Corporal Jones would say, “don’t panic!” A housing correction is still unlikely to last more than four years and historically property is an asset which has consistently outperformed gold in the long term. People will always need somewhere to live – rent or buy - and demand for housing hasn’t gone away.

Investing should usually be considered as a long-term commitment of at least ten years and naturally you should expect some peaks and troughs along the way. Of course, there is always the problem of predicting when the market will reach the bottom – the best time to invest - something even the experts are finding hard to predict.

The key to finding the best property investments is to gain access to good local knowledge which will help secure genuine deals at prices below market value. So with property requiring specialist knowledge and stuffing money under the mattress out of the question, let’s look at the case for gold.

In the long term gold is a real asset like property, but with the added bonus of being liquid. Sure, it costs you money to store, but it is always marketable at the same time. There is also the current economic malaise to consider, food prices and oil have risen to record highs fuelling inflationary pressures on governments around the world. Some are predicting that oil will soon hit a previously unthinkable $200 a barrel. There is also the suggestion among doomsayers that confidence in fiat paper currency may be breaking down.

Apart from providing the essential raw material for jewellery, the mere mention of gold triggers great excitement among gold enthusiasts. They religiously track its progress through complex charts interpreting its peaks and troughs by the day, hour or week or month looking for evidence to support their view that gold is where you should be investing your money.

On the face of it, they have a strong argument.

Governments across the world are frantically trying to stimulate growth in their economies by slashing base rates, the resulting devaluation of currencies and inflation makes conditions perfect for gold to rise. Gold is a hedge against inflation providing some stability in an unstable global market place. As any advocate of the yellow metal will tell you, when all else fails, gold always holds value, as history has proved.

Where once the main topic of conversation over dinner was property, people are increasingly talking about gold. Gold is the new property. If you bought gold for $600 an ounce in January 2007 it would now be worth between $800 and $900. A good return by any measure, a sure thing…

So is there a downside?

Again this depends on whether you view gold in the short or longer term. In the short term the gold price is volatile, after peaking to a record $1000 a troy ounce in March it is now hovering around the $850 mark. This is hardly a crash, but demonstrates how the market is driven by speculative investment when times are bad for the economy. When economies were roaring along property and shares were the fashionable place to put your cash, therefore what happens when the good times are back? Can we rely on all those investors staying put while the big returns are made elsewhere?

The point is that gold is good for the risk averse, but it would be wrong to invest all your cash in it because it is little more than a store of value. You can’t leverage gold and it doesn’t produce yields.

So, if we ignore other commodities and label them ‘handle with care’, this leaves us with stocks and funds. Investors familiar with the stock market will tell you that in the long term equities outperform every other asset class. Buying the right shares can mean big returns depending on how profitable a company is in the future, however as with anything which relies on future performance, this can also be a risky strategy. You could also opt for funds, but avoid choosing a fund just because it has done spectacularly well in the past. Any decision to invest in funds needs to be considered carefully, ask anyone who invested their money in some property funds recently - an area having its toughest time for 20 years.

Before you even consider where to invest your cash, there is one question you should ask yourself, how much risk am I prepared to take? Depending on your appetite for risk you might consider any or all of the options mentioned earlier. There is no easy answer and even the experts get it wrong, so the sensible strategy is to spread your risk. Develop a broad portfolio which contains an element of gold. A broad portfolio will greatly increase your chances of weathering the financial storm.

The alternative? Invest your money in a high interest savings account and wait for the storm to pass, but beware, base interest rates are falling and this will reduce your returns.

And you may also ask yourself – are banks a safer bet than under your mattress these days anyway?

About the Author

Editor of www.goldpricecrash.com

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