The bears are winning again. And I'm not talking about the professional football team from Chicago.
After an all-too-short bounce, the S&P 500 is again in a bear market. So is the Dow Jones Industrial Average. The Nasdaq Composite Index has been firmly in bear market territory for weeks.
What should investors do with the stock market in the doldrums? Here are three ideas about where to invest $10,000 right now.
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1. Series I Savings Bonds
Arguably the smartest place to park $10,000 right now is in the U.S. Treasury's Series I savings bonds. These bonds currently pay an interest rate of 9.62%. You're guaranteed to receive that rate for the first six months you own the Series I bonds. The rate you'll receive for the next six months will be announced on the first business day of November.
The "I" in the bond's name stands for inflation. The interest rates are based on the change in the most widely used inflation metric -- the Consumer Price Index for all Urban Consumers (CPI-U). It's theoretically possible that the CPI-U change could be zero or even negative. If that happened, your annual interest rate would only be 4.81% (the sum of 9.62% plus 0% divided by two). It's unlikely, though, that the inflation rate will fall that much by November.
The main downside to investing in I bonds is that you can only $10,000 of them per person per year. (Technically, you can also buy up to $5,000 more of the bonds. However, these extra bonds can only be purchased with a federal tax refund.)
Also, you'll have to hold onto the bonds for at least one year. If you cash them in before five years, you must forego any interest from the previous three months. Even with these drawbacks, though, there's no better way right now to get risk-free high single-digit-percentage returns than I bonds.
2. Vanguard Small-Cap Value Index Fund
If you've already put $10,000 into Series I savings bonds and have more money to invest, there's another alternative to seriously consider: the Vanguard Small-Cap Value Index Fund (VBR 1.13%). This exchange-traded fund (ETF) doesn't offer the guaranteed return that I bonds do. However, it's a great pick for long-term investors.
Small-cap value stocks have delivered higher annualized returns than any other type of equity since 1930. VBR provides an easy way to invest in these stocks. The ETF owns nearly 900 stocks with a median market cap of $5.6 billion and an average price-to-earnings ratio of 10.4.
VBR has fallen quite a bit year to date. But it's outperforming the broader market indexes, including the S&P 500.
Small-cap and value stocks also tend to bounce back the strongest after economic downturns. If the U.S. economy enters a recession, VBR could be a big winner when the rebound eventually comes.
3. Vertex Pharmaceuticals
For investors looking for one specific stock to buy with $10,000, check out Vertex Pharmaceuticals (VRTX 1.25%). I think that Vertex is arguably the best stock to buy with recession fears increasing.
Vertex has already demonstrated its ability to defy gravity. The biotech stock has jumped nearly 30% this year while the S&P 500 has plummeted.
The company continues to generate solid revenue and earnings growth. Vertex has an impressive cash stockpile. It could have a near-term catalyst with plans to file for regulatory approval of exa-cel in treating sickle cell disease and transfusion-dependent beta-thalassemia.
Vertex also has exceptional long-term growth prospects. It commands a monopoly in treating the underlying cause of cystic fibrosis (CF) and could easily expand its market share by over 50% in the coming years. The big biotech also has two promising late-stage candidates outside of CF with blockbuster potential.
Importantly, Vertex's fortunes don't depend on how the economy performs. Even if the bears keep winning in the stock market, this biotech stock should remain a winner.
