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January 16, 2006

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I used to agree with Rule #2, now I think I would use protected stocks and aim for more upside.

http://www.protectedstocks.com/main/2005/10/chapter_1_struc.html#more

I use CDs to hold a large portion my emergency fund. They are set up as a 5-year ladder. The base of the fund is in a money market. I'm tempted to move from CDs to an index fund, but I'd really rather have the stability CDs afford.


"stocks can help your portfolio beat the debilitating effects of inflation." This is a myth. If you were to look at a chart of yearly SP500 returns and yearly
inflation you would see that stocks go down or sideways in times of moderate to high inflation. 2005 was a good example. Stocks do well during times of low or lowering inflation, the 1990's for example. The brokerage industry doesnt tell you this so as to perpetuate the "buy and hold" methodology.
If one is worried about the effects of inflation, there are Ibonds and TIPS available. The fixed rate still provides some growth. The only reason to buy stocks, mfunds, etc is for growth, to make money. There is a risk premium to be considered tho. Ask those who invested in 2000 how they feel about stocks beating inflation?

Why would brokers wabt to perpetuate the "buy and hold methodology" ? Seems to me B&H has the effect of minimizing trading (and thus commissions, aka the broker's paycheck). If it's because they want you to keep your money in one place, I would think pushing CDs would be a better vehicle for that end.

I just don't see Rich's argument making sense. I'm not arguing against his thesis (although I don't believe it is correct) but his reasoning is suspect.

jaz

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