3 Much Better Bets Than Plunging Term Deposits

If you thought term deposit rates were low now, look out below come September.

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It doesn't take much to fire up the doomsters.

"Worst day for local stocks in seven weeks" screamed the headline in The Australian Financial Review.

In the same publication, after the S&P/ASX 200 fell 1.1% yesterday, Altius Asset Management's Chris Dickman was quoted as saying…

"The volatility index is currently at lows not seen since the height of the global financial crisis in 2008 and if that doesn't ring alarm bells for people I don't know what will."

Mr Dickman may be right. We may be on the cusp of a correction. Heck, we're well overdue.

Or maybe not. My "Market Correction Crystal Ball" is a little cloudy today, just as it was last week, last month and last year.

Yesterday's market drop changes nothing, except that stocks are now cheaper. What's not to like about that?

As I said on Tuesday, I'm still buying stocks, while maintaining a healthy cash balance for those truly "back up the truck" opportunities.

Cash can be a wonderful hedge against market declines, but only if you are truly prepared to deploy that cash.

Too many investors sit on too much cash for too long.

They wait for the opportune moment, then wait some more, and some more, and some more… and before you know it, the opportunity has passed.

Only in hindsight can you pick the absolute bottom of the market. Even Warren Buffett missed it during the GFC, his "Buy American. I Am" piece in The New York Times being published five months before the market bottomed.

If Buffett can't time the market, what hope have us mere investing mortals?

Instead, rather than fretting about a market correction, waiting for a market crash, or simply doing nothing, a much better bet is to regularly and consistently invest in high quality stocks.

I'm about to practice what I preach, committing to buying shares in at least one of Motley Fool Share Advisor's brand new Three Best Buys Now stocks, published exclusively to subscribers after the market close today.

I know one stock that won't be on the list — Sirtex Medical Limited (ASX: SRX). It's a triple for Motley Fool Share Advisor subscribers who followed our buy advice back in April 2012.

While the stock has had a great run to over $18, and one fund manager says Sirtex has the potential to be a $100 stock, at its current valuation, Scott Phillips currently rates the company as a hold.

I already own a decent number of Motley Fool Share Advisor recommended stocks — all of which I'd be very happy to top up on my existing holding — but there are also some stocks I like but just haven't got around to buying.

And after yesterday's "worst day," where shares were sold off across the board, some indiscriminately so, there's a good chance I'll be paying less for my new position than I'd have done just a few days ago.

Like yours, yesterday my portfolio took a hit.

After a great start to the new financial year, it was a bit of a shock to the system. But in the whole scheme of things, and given my investing horizon stretches for decades, not days, it was totally immaterial.

Put simply, regardless of what happened yesterday, I expect my wealth to be exponentially higher in the years ahead.

Today, the ASX is as flat as a pancake, despite a Wall Street rebound overnight.

Commenting on Bloomberg, John Fox of Fenimore Asset Management said…

"There's still money on the sideline. As long as earnings keep going up and stocks are fairly valued, the market can keep going."

If he's right, Dow 17,000 could soon become Dow 18,000, and more…

And where Wall Street goes, the ASX usually follows.

Speaking of money on the sideline, the same holds true here in Australia, with Philip Baker reporting in the AFR that collectively, cash represents about 22% of household's financial assets.

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It's a record number, but probably not for a whole lot longer, especially if  Goldman Sachs economist Tim Toohey is right on his latest interest rate call.

The Age reports Mr Toohey as saying he would not be surprised to see the Reserve Bank of Australia (RBA) cut interest rates as soon as September 2014.

That's just two months away!

If you thought term deposit rates were low now — and they are, paying just 3.5%, if you're lucky — look out below come September.

Regular readers of our Motley Fool Take Stock email will know I've long been saying interest rates are likely to stay at these generational lows for an extended period of time.

Adding to the case for an interest rate cut is the persistently high Aussie dollar, now trading solidly back above US94 cents.

The high dollar may be great for overseas holiday-makers and buyers of US shares, but it's a persistent headwind for Australian companies and the Australian economy. 

Add it all up, and it's hard to see how the RBA would NOT cut interest rates.

All of which could mean…

  • While the dollar is still strong, now is a great time to buy US stocks.
  • With term deposit rates potentially falling even further, by comparison, companies paying fully franked dividends will look even more attractive.
  • With households sitting on billions of dollars of cash and deposits, and house prices looking stretched, the wall of money fleeing term deposits will have nowhere to go BUT the share market, and hopefully into those new Three Best Buys Now stocks.

No wonder then Credit Suisse recently upped their target for the S&P/ASX 200 to a nice round 6,000.

It all adds up to the potential for a meaningful stock market rally in the second half of this year, and I'm getting in BEFORE the party starts.

Bruce Jackson does not have an interest in any companies mentioned above.

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