Finance and Investments Blog |

In the wake of the financial crisis—when the stock market has fallen and risen as much as 900 points in a single day—a lot of folks are wondering what to do with their money.

In the wake of the financial crisis—when the stock market has fallen and risen as much as 900 points in a single day—a lot of folks are wondering what to do with their money.

Some people turn to U.S. Treasury bills and bonds, which have traditionally been viewed as the safest of investments because of their government guarantee. This "flight to safety," at one point, drove the yield on the three-month U.S. Treasury bill down to 0% for the first time since January 1940. When you factor in inflation, the "real" return was below 0%—meaning investors were willing to lose money in exchange for a safe place to park their money.

Another alternative is literally stuffing cash under the mattress. On the surface, it doesn't seem like a bad idea. Many bank accounts are now yielding as much as 3%, and the FDIC has raised its insurance ceiling on deposits. At the same time, the U.S. government has rolled out a temporary insurance program to prevent money market funds from "breaking the buck," or falling below $1 per share.

But, cash won't offer any returns, with consumer inflation hovering around 5% so far in 2008. Cash may not even let you break even.

There are always other options, such as commodities, real estate investment trusts (REITs) and even private equity funds. The problem is, these investments are hard to value, and difficult for individual investors like us to understand and invest in. And these investments are subject to the same economic pressures as everything else.

So, we return to what we know - stocks. Benjamin Graham (the godfather of value investing and Warren Buffett's mentor) once wrote that when we're challenged by an investment environment, we should "distill the secret sound of investment" into three words: margin of safety.

To Graham, staying within the margin of safety simply meant buying a stock only when it is worth more than its market price. How much more depends on the type of stock. For example, for a high-quality stock, you might want to pay a maximum of 90 percent of what you consider the stock's actual value. But for a troubled stock, you might want a greater cushion, choosing to pay no more than 50 percent of what you consider the stock's actual value.

Those are wise words in today's market envrionment, when all stocks are down, but only some (such as banks) are fundamentally troubled. Indeed, earlier this year, as the market plummeted, Buffett announced that he considers the malaise a buying opportunity.

"To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions," Buffett wrote in an October 17 column in The New York Times. " But fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now."

History backs him up: the stock market has always gone up over the long run. From 1951 through 2007, the S&P 500 Index saw positive returns in 44 of 57 calendar years, according to Thomson Financial. At the end of 2007, its 25-year average annual return was 12.83%.

Sure, getting back into the markets now feels risky. But there's also risk in doing nothing: Due to inflation, $100 left in the bank in a non-interest-bearing account will have a purchasing power of under $74 in 10 years, assuming a hypothetical 3% annual inflation.

The point is, the time to act will be coming soon. Whatever you do, don't hide. It's time for all of us to take control of our investments, stay informed, and be ready to pounce on opportunities. As Buffet said, "Be fearful when others are greedy, and be greedy when others are fearful."