Persistently strong stock prices are as much a threat to smart investing as falling markets.
You can see this in the rising number of questions I'm getting from investors who are nervous about buying into the stock market right now and are looking at alternatives. One reader wonders about market-linked guaranteed investment certificates, another asks if there is such a thing as an exchange-traded fund that provide exposure to stocks while guaranteeing your initial investment.
Categorically, any investment product that offers stock market exposure with no risk of losing money should be avoided. These investments seem ideal for jittery investors, but the reality is that they're designed to be profitable for the issuing financial institution and not for the investor. Anyone who truly understands how they work would never buy one.
So what to do if you have money to invest and are nervous of stocks. Here are four ideas:
- A balanced fund: Balanced funds are by far the most popular category of mutual fund, and there are a few ETF options as well. Most offer instant diversification through big holdings in both stocks and bonds, which should hold up well if the stock market falls. You can lose money in a balanced fund, but less than if you just held stocks or equity funds.
- A GIC ladder: For conservative investors who don't need access to their money. Invest equal amounts in GICs maturing one through three years. When a GIC comes due, invest in a new three-year term. Returns from a GIC ladder are dependable – you might in theory do better with a market-linked GIC, but you could also do worse.
- Dollar-cost averaging: Pick an equity fund or ETF or stocks and buy gradually instead of all at once. For example, use 20 per cent of your money now and invest the rest every few months over the next year or so. Doing this avoids the pain of putting all your money into a market ready to drop; if the market does fall in the months ahead, you'll have a chance to buy in at reduced prices.
- A high interest account: Pretty much all investment dealers offer investment savings account products, which are bought and sold like a mutual fund. Current rates on these products are in the 0.95 to 1 per cent range, which is tiny. On the plus side, investment savings accounts are issued by banks and protected by Canada Deposit Insurance Corp. Don't use an investment savings account permanently – it's just a parking spot for use until the markets decline and you're ready to start buying.