Get your money working harder for you
Are you frustrated with your bank savings interest rates? We have a few options to get your money working harder for you.
When it comes to building a robust and diversified investment portfolio, there's more to consider than just individual equities and real estate. CDs and bonds are often overlooked but can be invaluable assets in any investor's toolbox, especially at today’s historically high rates.
Generally speaking, the S&P 500 return is 10% annually on average since 1957, according to Seeking Alpha1. But in a year with market uncertainty, constant volatility, and rising interest rates, a smaller return with reduced risk may be a preferable option to some. Because of elevated interest rates, there are both CDs and bonds that are paying in the 5.5%- 7.2% range2. And the Fed’s future path is uncertain – these rates may increase over time.
CDs are fixed instruments, so any rate increase won’t affect those you hold now. But you can stagger your purchases and build a CD ladder, which allows you to layer new CDs at increasing rates so that you may be able to benefit from rising interest rates.
This is possible because all CDs have a term – a fixed contract date – and different interest rates will be offered for different durations. CDs also have the advantage of being FDIC-insured up to $250,000.
That brings us to our other strategy, bonds. The FDIC insurance is one thing CDs can offer that bonds are not. However, bonds may pay a slightly better return to help compensate you for some additional risk. For example, we’re currently seeing high-quality corporate bond rates as high as 7.2%5. And there a lot of different types of bonds – corporate bonds, municipal bonds, and even United States Treasuries.
With bonds, it's going to come down to duration, quality, and tax status. Different maturities will pay out differently and have different values. For example, one of the advantages of municipal bonds is the tax status – currently, they are paying close to corporate bonds and can be triple tax-free – meaning that they are exempt from federal, state, and local taxes. When you factor in taxes, that usually means a higher return than corporate bonds.
Like CDs, you can also ladder bonds, which allows you to take advantage of rising rates. The downside of bonds is that you’ll have more risk than CDs, especially credit risk.
Bonds and CDs are a bit more conservative than the strategies we usually talk about. Generally speaking – if your time horizon is long enough – the S&P 500 historical average returns should win out. However, with the combination of market uncertainty, constant volatility, and rising interest rates, many investors are seeking other options.
If you have cash you’d like to get working more efficiently but don’t like the risk of the stock market, give us a call. We’re always here to help!
1: Seeking Alpha: What is the Average Return of the Stock Market? November 11, 2022. https://seekingalpha.com/article/4502739-average-stock-market-return
2: Rates Sourced from Fidelity Bond Beacon as of September 13, 2023. Subject to change. Subject to availability at time of purchase. CD rates based on FDIC brokered CDs. Bond rates based on investment-grade corporate bonds. Average minimum deposit of $5,000 per product. Fees will reduce account earnings. A penalty may be imposed for early withdrawal. Lineweaver Wealth Advisors may impose a minimum account balance for new and existing accounts. Bonds are considered fixed-income securities and if sold or redeemed prior to maturity may be subject to an additional gain or loss. Bonds are subject to interest rate risk. Bond prices generally fall when interest rates rise.
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