Should Everyone Own Stocks?

| June 9, 2011 | 0 Comments

Last weekend I was catching up on some of my reading.  I was trying to make a dent in the stack of books, magazines, and articles piling up on my desk.  You see, I’m constantly looking for new investment ideas for my readers.

As I was reading one particular magazine, the words jumped off the page and hit me like a ton of bricks.  The author was talking about retirement investing strategies.  While doing so, she made a most ridiculous claim…

She said, “Everyone should own stocks at all times.”

I disagree completely.

Don’t get me wrong, I love stocks.  They’re an important part of a well-diversified portfolio.  And I must admit, I enjoy watching my winners drive up the value of my account.

But believe it or not, stocks aren’t always appropriate for all investors at all times.

You might fall into this category yourself… Let’s find out.

Every year, thousands of people in the United States take a leap of faith.  They take their life savings and invest in something you can’t buy with the click of a mouse.

And for this investment to pay off, they have to put in a whole lot of sweat equity.

I’m talking about small business owners of course.

Starting a small business is one of the riskiest investments you can make.  The US Small Business Administration says about half of new businesses fail in the first five years.  Not the best odds for an investment.

What’s more, a new business takes a toll on you and your family.  Your income from month to month jumps around like a kid on a pogo stick.  And, there’s no guarantee hard work will produce a profitable business.

That, ladies and gentlemen, is the heart of the problem…

Imagine if your business is struggling… Then you turn on CNBC and find out the market is taking a dive.  How would you feel if your net worth dropped by 20% in the blink of an eye?

I’m guessing you’d have enough stress and anxiety to keep Dr. Freud busy for a long while.

Now most people who start a business are considered risk takers at heart.  But I doubt many could handle losses in their retirement account while struggling to build a successful business.

And business owners aren’t the only ones at risk.

There’s another group who should be wary of investing in stocks… Independent Contractors.

As the economy recovers, more companies are adding workers.  The problem is they’re bringing them on as contractors, not regular employees.

With the economy still recovering, companies are taking a wait and see attitude before adding more people to their payrolls.  Maybe you find yourself in Contractor Limbo?  It has to be tough knowing your job can end at any moment.

Believe it or not, many contractors have the same problem as small business owners.

The lack of secure income makes it too risky to gamble in the stock market.

Over the long run, stocks give you the best return for your money.  However, you should never invest money you might need short-term.  If you do, you will normally find you’ll need to get your money out just as your stocks have dropped significantly.

Don’t worry, I have a solution for you small business owners and contractors.

I’ve found three ways to side step the risk of owning stocks and still grab solid returns.

The best part is you don’t have to worry if the Dow drops 20% or 30%.

Let’s take a closer look at these ideas…

The first one is the Vanguard Total Bond Market ETF (BND).  This fund is broadly diversified with holdings in government, corporate, and international bonds.

Besides great exposure, you’re getting a yield over 3%.  And, with a low expense ratio of just 0.22%, the fund is cheap to own.

Now you won’t see the type of long-term gains you might get with stocks.  But the fund gives you a much better return than if you just parked your money in a regular savings or money market account.

Now if inflation rears its ugly head…

You want to take a look at iShares Barclays TIPS Bond ETF (TIP).  Buying this fund gives you exposure to government bonds with a twist. You see, the bonds in this fund provide protection against inflation.  When inflation increases, the principal of the bond increases as well.

You’ll sleep much better at night knowing your returns are keeping pace with inflation.

Now, if you want to take a bit more risk and stay out of stocks, you’re in luck.

You can always put money into High Yield Bonds.  These types of bonds pay higher yields because the companies issuing the debt have a higher chance of defaulting on it.

High Yield Bonds can be risky…

However, owning a diversified portfolio of bonds minimizes your risk.  You can achieve this by simply buying the SPDR Barclays Capital High Yield Bond ETF (JNK).

The fund owns over 200 different bonds, so you don’t have to worry if a few companies default on their debt.  At a current yield of over 8%, you’re getting stock market like returns without all the downside risk.

If you’re starting a business or working as a contractor, you don’t want to expose your retirement accounts to high risk investments.  The three ETFs I mentioned will provide decent returns without too much risk as you move through this temporary phase.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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