If you prefer to receive 0.25% interest on your money and know that your principal is safe rather than worry that the market may take another 50% dive, then you should not be in the stock market. If you cannot emotionally handle the stress, then the markets are not for you. However, your only choice will be to save nearly 20% to 30% of your income for your retirement. If you prefer to stay out of the markets, we suggest staying in cash rather than committing to 0.25%, as we firmly believe interest rates will rise.
Looking at historical interest rates, our current low interest rates are so far outside the norm. We think when they rise, they will rise by 5% to 7% in one year. If you were a conservative person, we almost suggest borrowing against your home, saving the money and making the payments.
If you have an adjustable rate mortgage, we strongly recommend you refinance to get a fixed rate mortgage. We have stressed the importance of securing a low interest mortgage for more than a year, because your expenses are the only thing you can control. You cannot control the decisions in Washington, what happens in Europe or what happens in the markets. You can control the cost of funds for you. The smartest minds are borrowing for as long as they can for the lowest interest rates available to them. If we do go off the fiscal cliff and taxes increase, having the mortgage only increases your deductions.
Why Not Stop Dollar Cost Averaging?
We believe you must commit to at least 10 years in the market. If you stop investing, you are saying that you do not believe the market will be in a better place in 10 years. In that 10 years, if you continue to dollar cost average, you are more likely to capture the lows. Given our low interest rate environment, we recommend buying financially strong companies. Why opt for a treasury yielding 0.25% when you can buy McDonalds Corp (NYSE: MCD) that yields a 3.2% dividend? We think that people will continue to eat hamburgers.
We understand that it is difficult to want to put your money to work, when so many feel whipsawed by what is going on in Washington. However if there is a change in administration, and pipelines are built, coal is being mined and regulations are reduced, we believe the economy will pop. If you are not in the market, that could be a mistake. On the other hand, if the administration does not change and the economy were to get worse, it is only four more years until the next election. We would continue to buy while the market is low. It still falls within our 10 year window of when we decided to commit to the market. We believe the economy will come back and the markets will rebound. We want to be invested when they do.