With banks paying historically low interest rates -- in many cases less than 1% -- they certainly don't seem to be a good place for your long-term savings. At least until you compare savings accounts with the stock market, where doubts about the economy are keeping prices depressed.
Then there's housing. Although prices have shown signs of stabilizing in some parts of the country, foreclosures continue to unnerve real-estate investors.
I've been investing in stocks, bonds and real estate for more than 30 years. For about 10 of those years I was a stockbroker for three major Wall Street companies, so this is a block I've been around. I also put my money where my mouth is, because I disclose exactly what I'm buying and what I own.
Although I can't tell you what's going to happen in the next few months, I'm not afraid to make some long-term bets, and I'm not afraid to show you where I'm putting my money to work.
Stocks: Dow 12,000 within 2 years
As I began this article, the Dow Jones Industrial Average ($INDU) was down 13% from its April highs and 10% below where it stood a decade earlier. Other major stock indexes were faring worse and were in danger of the 20% declines that would signal an official bear market, triggering additional selling.And there's certainly no shortage of negative news. There's more talk of a "double-dip" recession. Europe is still in an economic funk. China's growth is slowing.
Before I tell you why, let me tell you this: Starting in March 2009, I began an online posting of a stock portfolio so readers could follow what I'm doing with my money. I also own stocks in my retirement plans, so this portfolio isn't my only exposure to the stock market. I'm not cherry-picking my picks. Each stock I buy outside my retirement plans is reflected in this portfolio at the price I paid, along with the date I bought it.
While this portfolio doesn't reflect my entire net worth -- I'm not going to disclose that online -- I assure you that this isn't "play money." It represents a significant portion of my savings.
My 20-year television career has included dozens of appearances in which I've been asked about the future of the stock market. When it comes to short-term predictions, I always say the same thing: I don't know, and neither does anyone else. In my opinion, only a liar or a fool will claim to know the immediate future when it comes to stocks. There are simply too many short-term variables that can potentially impact stock prices. Textbook example? The Gulf oil gusher wasn't on anyone's radar, and it has certainly influenced stock prices.
Predicting long-term stock prices is much easier and is the only type of prediction that matters anyway, because stocks are a place where you put money you absolutely, positively won't need for at least five years.
I think the stock market will be at least 20% higher two years from now. The primary reason is simple: In order for stocks to stick to their historical growth rate of approximately 9% annually, they'll have to go higher.
As I mentioned, stocks are down 10% over 10 years, so in order to equal their average annual return over the past 100 years, a sustained move higher has to appear. The only real question is when.
Potential problems with my "revert to the mean" investment strategy:
- The world may have changed. In other words, the stock market won't return to its average annual return of 9% because the investment environment is permanently altered. Possible? Sure. It's also possible the world will come to an end in 2012, but betting against history generally isn't a great idea.
- The timing may be wrong. Just because stock market returns have dipped below historical norms and should ultimately revert to the mean doesn't suggest a rally has to start soon. On Oct. 1, 2008, the Dow closed at 10,850, not far from where it was on Oct. 1, 1998. The logic I'm applying could have been used to suggest buying stocks then, but that certainly wouldn't have been a good idea, because five months later the Dow had dropped about 40%, to about 6,600.
Although this example deserves consideration, I'm betting that stocks will outperform over the next two years. If the world has changed to the extent that the stock market will never again offer positive returns, potential implications are dire indeed: The U.S. economy could fall into a long-term economic depression, and even the capitalist system might no longer be viable. In either case, the only decent short-term investment might be gold (which I own), and the best long-term investments would be canned food and guns.
As for the timing, it's true that a "revert to the mean" rally doesn't have to start tomorrow, next week or next month. There are issues that could drive prices lower, maybe much lower. That's why my prediction for the Dow is for two years from now.
But that's OK. I never invest all at once, and I always keep some extra money on the sidelines. If the market takes off tomorrow, I win, because I already have a bunch invested. If the market falls, I'll simply buy more, as I did with Citigroup (C, news, msgs) on April 16 and may do again soon. And I'll be patient. My most recent purchases of Citigroup are now "underwater", but I bought this stock because I think it's going to $20 a share -- not 10 months from now but 10 years from now.
When it comes to investing in things such as stocks, by the time the prognosis is certain and bright, the easy money has already been made. When you look at my portfolio, you'll note how many stocks I bought in spring and summer 2009. That was when times were the darkest and few of the high-profile prognosticators on Wall Street were recommending stocks. The news was all bad, and the Dow was hitting new lows. By the time the recession was pronounced dead, in late 2009, the Dow had already rebounded to 10,000, and many of my picks were up more than 50%.
Legendary investor Warren Buffett said it best: "Be fearful when others are greedy. Be greedy when others are fearful." Today, investors are fearful.
Continued: Real estate prices will rise
