New Financial Plan

The Giants surprised a lot of people in beating the Patriots.  Who would have thought that so many experts could be wrong?  As far as picking the winner I’d guess that more people picked the Patriots than picked the Giants.  Of course bets and odds are made based on perception.  Everyone thought the Patriots were very likely to win big, enough so that the spread was 13 points.  I don’t know how well that spread evened out the money bet against it, but the people who make that number are good at it, so I’d guess it balanced things out quite a bit.  So the spread is a handicap that brings more money to bet for the Giants when betting against it, but probably more money betting for the patriots straight up.  After all, if the experts are saying the game will go one way by 13 or more points it is a pretty strong prediction.

What about the markets?  Many experts have made their picks for the year and have predicted market returns.  There are all kinds of forecasts.  There are also predictions for inflation, current measures of inflation, and the opportunity to lock in yields through bonds.  That brings me to my question for you.  What spread are you looking for to invest more in stocks now?  Some people saw the recent declines as enough of a discount to jump in.

The reason for investing in stocks is believing that they will return more than other investments over the time frame you want to invest.  Investing in indexes is supposed to lower the risk involved.  So stock indexes will hopefully return more than bonds.  If your index has decent dividend yields it makes it feel even safer, since that yield makes the spread between stocks and bonds smaller.  In theory that means stocks only have to go up by that spread percentage to break even.  Any returns above that should mean stocks were the better investment.  Then Citigroup slashes it’s dividends.  What is the new yield on the index?  What is the new risk picture on the index?  How much weight does Citigroup have in either of those considerations?  This all goes back to what extra return you expect from stocks for the extra risk you are taking on.

Experts look back over the history they have recorded and pull out averages.  Those numbers influence expectations.  Stocks historically yield 10% over time.  Over longer periods stocks are several percentage points favorites over current bond offerings.  How will you bet on that spread?