Monday, Feb. 23, 2009
STOCKS, BONDS OR UNDER YOUR MATTRESS? K-STATE INVESTMENT EXPERT OFFERS ADVICE
MANHATTAN -- Figuring out how and where to invest your money has become more of a challenge in light of the nation's current economic struggles, according to a Kansas State University investment expert.
But Eric Higgins, associate professor, Gates Capital Management Faculty Fellow and head of K-State's department of finance, says it is important for investors to consider their investment time horizon before committing or reallocating their investment assets.
"If an individual is planning on retiring in a few years or needs funds to pay for a college education, then preservation of capital is important," Higgins said. "Thus, those investors that have short investment time horizons should consider safer investments like certificates of deposits or money-market mutual funds."
If your investment time horizon is broader, Higgins said the stock market should be considered.
"Historically, the returns that can be earned in the stock market exceed the returns that can be earned in the fixed-income market. In the long run, it is likely that stocks will outperform bonds," he said.
"In addition, for investors that are making regular contributions into retirement accounts, now is the time to take advantage of dollar cost averaging," he said. "Dollar cost averaging refers to the fact that individuals that make fixed investments in their retirement accounts on a regular basis are always buying more assets when prices are lower, and fewer assets when prices are higher. Right now, prices are low."
For investors who are too nervous to be in today's roller-coaster stock market, Higgins said there are safer investments to consider.
"During economic times like these, investors are likely to turn to fixed-income investments like bonds, especially government bonds," he said. "But now is not really the time to buying be bonds for the long term. Bonds are trading at all-time highs, especially government bonds. The peak time to buy corporate bonds was probably in November."
Higgins said yields on AAA-rated corporate bonds have decreased and prices have risen such that they are now more reasonably valued relative to government bonds.
"Right now, if investors are looking to stay out of the stock market, I would stay reasonably liquid," he said. "Invest in shorter-term certificates of deposit and money market mutual funds so that you can have more rapid access to your money reasonably. This will give you the flexibility to re-enter the market when things have calmed down and will protect your principal."
Higgins' areas of research include market efficiency, corporate finance and financial institutions. His research has been published in several journals including the Journal of Banking and Finance, the Financial Review, the Journal of Financial Research and the Journal of Business Finance and Accounting. His work also has been presented at the prestigious Bank Structure Conference hosted by the Federal Reserve Bank of Chicago and at conferences hosted by the Federal Deposit Insurance Corp. and the Federal Reserve Bank of Philadelphia. His research also crosses different disciplines. He has co-authored a publication in the journal Business and Society, which is regarded as a top-level publication in the management area.
Higgins graduated magna cum laude from K-State, where he earned his bachelor's in finance. He earned a doctorate in finance from Florida State University.