Have An Advantage Over The Pros

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FIPigs still can’t fly and hell hasn’t frozen over, but interest rates have gone negative, and that’s weird enough. In early March, about a quarter of the debt issued by euro zone governments traded with negative yields. On March 9, six-month Germany Treasury bills—Unverzinsliche Schatzanweisungen—were auctioned to yield an annual rate of –0.22 percent. This means that if you buy a German bill and hold it to maturity, you won’t get all your money back. And Germany is having no trouble finding investors willing to accept those terms.

Keep those Unverzinsliche Schatzanweisungen in mind as you look for ways to make money. Whether it’s oil futures or oil paintings, each investment opportunity competes with other investment opportunities. When the German government gets away with paying negative interest, it’s a sign that investors don’t think they have better options. If they did, they would be putting their money into them. After a long, strong rally in the major world markets, it’s time to lower your expectations for growth.

On the bright side, individuals have a big advantage over the pros at a time like this: They don’t need to put up with negative rates, because they don’t have millions of dollars in need of short-term safekeeping. And they don’t have to report their results quarterly, so they can tune out the din of conflicting advice and focus on the long run. While the pros worry that healthy economic growth will hurt stocks in the short run by encouraging the Federal Reserve to raise interest rates, ordinary investors can hope that growth will result in more jobs, increased spending, higher corporate profits—and higher stock prices.

Easy money from the Fed and other central banks has been rocket fuel for stocks and bonds. An investment in the Standard & Poor’s 500-stock index has returned almost 23 percent a year since the low of March 9, 2009, including reinvested dividends. “That’s stupendous,” says Michael Hartnett, chief investment strategist for Bank of America Merrill Lynch Global Research. “It cannot continue indefinitely.”

*NYSE, Nasdaq, and AMEX stocks, excluding ones that lost money.

*NYSE, Nasdaq, and AMEX stocks, excluding ones that lost money. Data: Wells Capital Management; Bloomberg Businessweek estimate

Markets are on edge as Fed policy-makers deliberate over when to start raising the federal funds rate, which has been at 0 to 0.25 percent since December 2008. “I’m still a longer-term bull, but this year is going to be volatile,” says James Paulsen, chief investment strategist for Wells Capital Management. 

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