Five Buckets and Snowbirds
By Derek Carawan, AAMS
There is a term that refers to folks who travel from the northern states to the warmer states when the cold weather arrives. Once the weather begins to turn warm again, they migrate north, only to repeat the cycle again the next year.
Investors are very similar in their behavior to these snowbirds. The movement of money from one investment to another is often based on how “hot” or “cold” the investment is, as well as the comfort level of the investor. In the past couple of decades, we have witnessed bubbles in bonds, technology, and real estate. We may be in the middle of one now regarding gold. Only time will reveal this. Money has moved to and from these “buckets” depending on the financial “weather”. Once things got stormy in one bucket, the money moved elsewhere. It seems that no matter how many times we experience this type of event, many investors still behave this way.
If you consider for a moment that you have 5 investment options (buckets):
- U.S. Stocks
- Bonds
- Cash
- International Stocks
- Certificates of Disappointment (CDs)
When stocks are “hot” more money will move into this bucket, leaving less money in the other ones. The same thing will happen when another bucket falls into favor with investors.
In 2011, several factors have attributed to the ebb and flow of money between these buckets. Low interest rates have reduced the number of CDs being renewed. According to Bankrate.com, 5 year CDs are only paying 1.12% to 2%. So expect some money to migrate elsewhere. We are now seeing an example of this as reported by JP Morgan’s Quarterly Guide to the Markets. Personal savings rates are as high as they were in 1995 and household debt has dropped from 14% of personal income to below 11%. I mean if you can’t get more than 2% on a 5 year CD, and you don’t want to put that money to work in the stock market, then why not pay off a 6% car loan. That’s not a bad return for some folks. You are essentially getting a 6% return by paying the loan off quicker.
What is important to remember here is that once Americans have paid off these debts, they will have more disposable income, which will boost another bucket. As consumers spend more in the years ahead, stocks should rise. Consumer behavior is setting the stage for market growth in the near future.
*Derek Carawan is a LPL Financial Advisor and LPL Registered Principal with Carawan Financial Partners, Inc. / Securities offered through LPL Financial/ Member FINRA/SIPC and may be reached at, www.carawanfp.com, 919-870-8181 or derek.carawan@lpl.com
These views are those of the author and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
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