February 13, 2022

The $1,000 Question

Dwight Cass
Forbes, The New York Times & Wall Street Journal Commentator

There are still good opportunities to invest your “found” money.

So, you’ve got an extra thousand to invest? An unexpected bonus, a payday from a new client, or long-lost Uncle Otto finally kicked the can? What you choose to do with it should depend on your risk tolerance. You can go out on a limb, take a measured approach, or be defensive. Let’s start with a high-risk example.

“Buy When There’s Blood in the Streets.”

That seems like an ugly sentiment, but Baron Rothschild, who made a fortune by betting on the Napoleonic wars, was not wrong when he said it. Here’s a contemporary example.

Right now, Russia’s armies are threatening Ukraine. President Biden has threatened to respond to any Russian incursion into Ukrainian territory by cutting off the new Nord Stream 2 natural gas pipeline from Russia to Western Europe. This pipeline would make Russia the biggest provider of natural gas to Europe.

Who wins if Russia invades and Biden pulls the plug on this pipeline?

U.S. natural gas exporters certainly might. Especially those who ship liquified natural gas to Europe. Investing some of those thousand dollars in the stocks of, say, EQT Corp. (EQT), the biggest U.S. producer, or Exxon Mobil (XOM), the second biggest, might be worth a thought. Mind you, this is the high-risk option, because energy company stock prices depend on a lot of factors, and oil prices (a major factor for all of them) are unusually high, even with the economy flirting with a downturn. 

Baron Rothschild might plow on in nonetheless. 

“Be fearful when others are greedy, and greedy when others are fearful.”

Warren Buffett is the master of the medium-risk approach, as his quote above reflects. But this takes discipline. Here’s how to do it.

If you invest through a company 401K, you might have heard of dollar-cost averaging. This is a good strategy in uncertain markets, because even if the market falls, you end up buying cheaper and cheaper shares.

You don’t dump the whole thousand in the market at once, and hope for the best. You put a hundred a month into a stock or ETF. You could choose an S&P 500 ETF, like the SPY (or its Dow Jones Industrial Average equivalent, the DIA). Both have super-low fees, so you are not paying to send your broker’s kids to college. More importantly, if you invest, say, $100 a month over ten months while the market is falling, and then it recovers, you have bought cheap and benefit more than most from the rebound. You could make a tidy profit by showing some of Buffett’s disciple.

The Best Defense...

If you are in a Boomer or Gen-X demographic and might want to retire in the next ten years or so, it’s perfectly sensible to take an even less-risky posture. With inflation rising and the Federal Reserve boosting interest rates in response, one haven is Treasury Inflation-Protected Securities (TIPS). These are US government bonds whose principal amount rises in line with the government’s CPI inflation indicator and, as icing on the cake, you get additional interest on the rise in principal amount. 

With inflation now running at 7 percent, that is a pretty good deal. You don’t even need to navigate the tangled and opaque world of bonds – there are ETFs backed by TIPS of different maturities. You can buy these with a mouse click through your online broker.

After 14 years of booming stock markets, investors might still want to be a Rothschild, or at least a Buffett, rather than a defensive government bond buyer. But for those seeking to take at least some of their winnings off the table and find a safe place to stash them, there are worse places they could choose than a TIPS bond or ETF right now.

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