Investing in the Stock Market: Trick or Treat?
Eileen St. Pierre, The Everyday Financial Planner
I don’t know about you, but I am sick of hearing financial commentators asking the so-called experts when they think the Federal Reserve will raise interest rates. They’ve been asking this question for years now. Every time Ben Bernanke and now Janet Yellen sneezed, there are hours of analysis on what the sneeze meant. Is it really going to matter?
The Impact of Quantitative Easing
In my column Q is Quantitative Easing for Dummies, I explained why the Federal Reserve is keeping interest rates low. Its purchases of longer-term bonds have caused the prices of these securities to go way up in value. The hope was that investors would find these securities too expensive and put their money somewhere else, thus leading to economic growth. This explained why we saw such a run up in stock prices as investors searched for higher yields. However, demand for government securities did not fall as much as anticipated because the rest of world’s economies were worse off than ours. The U.S. government was still seen as a good investment compared to the rest of the world.
Now all the talk is about whether the stock market has gone up too much and will experience a correction. Indeed, the past few weeks have felt like a rollercoaster ride when I tune in to watch Nightly Business Report and get the closing numbers.
What are retirees to do?
In the meantime, retirees and those nearing retirement have been left with very little investment options. Bank CDs and quality corporate bonds just don’t pay enough in interest to generate enough income to cover expenses in retirement. Many have been told to invest in high-dividend paying stocks to generate more income, but they are not sure if they should take on the risk.
US News & World Report recently debunked seven myths about dividend-paying stocks including:
- They are not a substitute for bonds.
- They do not provide adequate diversification.
- They are not a reliable source of future income.
- The dividends may not hold up in bad markets.
So for many, investing in the stock market has felt more like a trick, not a treat. I try to argue that investing in stocks will provide treats in the long-run, but many cannot wait that long. The key to all of this is for Congress to provide some certainty over the future of economic policy. That seems a lot to ask of voters in the November 4 mid-term elections.