A harsh dose of stock market volatility in May 2010 sent many investors running for the exit. or those who have chosen to pull back on their stock allocations, the next question is where to put the money until the storm blows over.
Four Alternatives to Stocks
Whether a period of market volatility is a wise time to sell stocks is another discussion entirely, having to do with your asset allocation strategy.
But for investors who have already decided to seek safe harbor from the stock market's wild ride, here are four popular alternatives -- and what you should know about their risk and returns.
- Bonds. The first thing you have to do is make the distinction between corporate, municipal, and government bonds. If you don't like stocks, it would be hard to make the case for corporate bonds. As for municipal bonds, given the poor fiscal condition of many municipalities, you may find yourself running headlong into one of the same risks -- a debt crisis -- that has been plaguing the stock market. US Treasury bonds offer security over the long haul, but prices may vary between now and their maturity dates. Also, fixed-coupon Treasury bonds may expose you to inflation risk.
- Gold, oil, and other commodities. Keep in mind that commodities are alternatives to stocks, but that doesn't make them any safer. Also, many commodities are economically sensitive, so you may still be exposed to some of the same risks you were when in stocks.
- Certificates of deposit. CD rates can be higher than savings account rates or money market rates if you stretch out the maturity dates, but committing to a CD term could expose you to inflation risk. That is, if prices rise when your money is in a CD, you'll be losing ground to inflation. Also, a longer-term CD may limit your flexibility for getting back into the stock market if you identify a hot buy opportunity.
- Savings or money market accounts. Savings account and money market rates are both on the low side on average, but you can improve your bank rates by shopping around. As long as you stay within FDIC insurance limits, these represent a truly safe harbor, along with just enough flexibility to allow you to make your next move when you want to.