The urge to steer clear of the volatile market is understandable. Alternatives such as junk bonds and commodities are not without risk, but they may offer calmer rides.
By Catherine Holahan
Now is the time to buy stocks -- if you're Warren Buffett, with his iron stomach, ability to score deals and billions in the bank. But you're not Buffett. And you're shying away from stocks until a ride on the Dow industrials ($INDU) feels a bit less like a roller coaster.
So, what do you do with your money in the interim?
Treasury bills are unattractive. The 2.78% annual return on 10-year Treasurys likely won't keep pace with inflation, which was nearly 4% last year.
And, though real estate may look cheap right now, it is still a very risky business, given the amount of unsold homes out there.
MSN Money asked money managers and found five nonstock investments that seem attractive. Mind you, just because these investments are not stocks doesn't mean they're without risk. Yet they look like stable bets compared with stocks, which have set records for volatility in recent months.
Buy junkBonds seem less risky than equities at the moment. Bond investors can be wiped out if a company goes bankrupt, but they're paid, before stockholders, a share of whatever assets remain. Bonds don't have the potential to exponentially increase returns like stocks, but few stocks seem capable of delivering significant gains this year.
High-yield bonds -- aka junk -- offer the most potential. Many investors have fled junk bonds because they have a greater risk of default than higher-rated bonds, but junk also offers a potentially higher rate of return.
Even some blue-chip companies considered to have a much lower risk of default declared bankruptcy, so why buy bonds of companies known to have a high risk of default? After all, the default rate for high-yield bonds is already 10%, and bond rating agency Fitch Ratings anticipates it could rise as high as 18% this year.
Because the credit crunch has also made it more difficult for companies to issue bonds of any sort, as investors have shied away from risk. As a result, junk-bond prices -- which fall as yields on those bonds rise -- look artificially depressed, and individual investors are starting to notice.
"A very high proportion of the high-yield market is already trading at distressed levels," says Mariarosa Verde, a Fitch analyst. "Some investors may find the risk-reward balance attractive at this point."
Investors have poured nearly $3.5 billion into junk bonds since the beginning of 2009, according to EPFR Global, which tracks the market for funds trading in that $850 billion sector.
"I think people are scared, and they figure, 'Why be greedy and buy the equity and take huge risk?'" said Zachary Cooper, a portfolio manager in New York who specializes in fixed income. "People believe they are getting a historically equitylike yield in junk bonds and taking less risk."
Many are calling the past 10 years in the stock market a 'lost decade,' but Tim Middleton has a different perspective.
Of all junk bonds, high-yield municipal bonds appear most promising, certified financial planner Andrew Horowitz says. Municipalities across the country have issued bonds because their tax revenues are down, in part, due to mortgage defaults. The $787 billion federal stimulus package should give these local governments an infusion of cash, making defaults on these bonds less likely.
For investors who don't want to pick through the trash of individual junk bonds, exchange-traded funds holding high-yield bonds are another opportunity. ETFs are funds that track a particular index or sector and are popular partly because they can give investors the ability to trade a group of different companies' shares as if they were a single stock.
This month, Van Eck Global of New York launched the Market Vectors High-Yield Municipal Index ETF (HYD, news, msgs), pegged to the performance of the Barclays Capital Municipal Custom High Yield Composite Index. About a fourth of the index is made up of investment-grade triple-B bonds. The other three-fourths are composed of non-investment-grade bonds.
Buy foodNo matter how low the market goes, people have to eat. That is Horowitz's motto and one reason he's looking at the commodity markets.
"Nibbling on this kind of investment is an interesting play," Horowitz says. "A stock can go out of business; you can't do the same thing to a commodity. You can't bankrupt a commodity. People have to eat. That is the bottom line."
Last summer's spike in oil prices and the enthusiasm for biofuels sent prices of commodities such as corn, rice and soy skyrocketing in June and July. Then they crashed. Americans' grocery bills, however, didn't drop in tandem. Food prices ended the year up 5.8%, according to the Bureau of Labor Statistics' Consumer Price Index.
Higher food prices coupled with steady demand should ultimately lead to a strong market for agricultural commodities, Horowitz says. One ETF in this area he likes is the PowerShares DB Commodity Index Tracking Fund (DBC, news, msgs).
Buy moneyThe recently approved $787 billion stimulus package and the massive bailouts by governments across Europe and Asia would caution against buying currencies. Printing all that money, after all, has to be inflationary. Right?
Yes. But the worth of any currency is relative.
As long as the same inflationary pressures are at play the world over, it doesn't matter that the dollar will eventually be worth less -- as long as the values of the British pound, the Japanese yen or the European Union's euro have similarly declined.
Of course, inflation won't ultimately affect all currencies in the same way. Some countries have promised to sell more debt and print more money than others. The key is to bet on -- or against -- the right currency.
Horowitz is betting against the euro. He believes the multitude of countries that decide the monetary policies underpinning the euro's value will make the currency difficult to stabilize. As a result, he likes Market Vectors Double Short Euro (DRR, news, msgs), an exchange-traded note (similar to an ETF) that gains 2% for every 1% decline in the euro's value relative to the dollar. It also, importantly, loses twice as much for every gain in the euro's value.
Bet against TreasurysIt may seem counterintuitive to both bet on the dollar and against Treasurys. But making both moves is a way to hedge. That reduces your risk by giving you a way to make money when the dollar goes up or down (yet limits your upside, too). And reducing risk is one of the main reasons not to be in the stock market now. Right?
Likely, the dollar will strengthen in the short term, making Treasurys more palatable. But the dollar will weaken in the long run as investors' appetite for risk gradually returns. As the dollar's value decreases, Treasurys become less attractive. Hedging allows you to avoid having to call the moment when the dollar's transition will happen.
When the dollar does start weakening, investors will stop hoarding Treasurys and buy something -- anything -- capable of at least beating inflation. That's the argument for buying an ETF that gains as Treasury prices fall.
The argument for a weak dollar is made stronger by the huge federal stimulus package. Pumping all that money into the economy should fuel inflation, especially if the stimulus succeeds in spurring business and consumer spending as well as government largesse. The more inflation rises, the more people will want an asset capable of at least retaining their money's value. That makes Treasurys, with the current yields, even less attractive.
One short ETF, ProShares UltraShort 20+ Year Treasury (TBT, news, msgs), has risen 27% since a Dec. 30 low of $35.85 a share. The ETF is structured to go up twice the amount that the Lehman Bros. 20+ Year U.S. Treasury index goes down each day.
Keep cashHere's a twist on a Wall Street adage: When there's blood in the streets, stuff your money in your mattress.
As depressing as that may sound, it's the mantra of many now-risk-averse investors. And as long as people are getting out of the market -- and staying out -- cash will be king.
That said, you needn't keep your money in a low-interest savings account. Money market accounts have higher interest rates and the same Federal Deposit Insurance Corp. protection as your average savings account.
Rates of return for most money market accounts, however, still don't beat last year's inflation rate of 3.85%. Some of the best ones offer just 2.5%, according to Bankrate.com, which tracks the rates offered by different banks across the country.
That rate is good as long as inflation remains near zero -- where it was in January -- or reverses course. But it's pretty awful if inflation returns the near 3% rate that has been the norm in the past decade.
In addition, unlike a plain old savings account, money market accounts don't let investors easily move their money into more-attractive arenas.
Still, with a money market account, you're not locked in for as long a period as, say, a 10-year Treasury bond. Most funds let you make several withdrawals a month.
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