In the last year, low interest rates have become the norm as the Fed has used them to combat the economic effects of the Coronavirus. This can make it challenging for investments like CDs, your savings accounts – even high yield accounts – to make enough to outpace inflation. That means that your money is essentially becoming less valuable over time, which gives you less buying power. Let’s talk about some strategies you can use in a low interest rate environment.
Bonds are really the classic vehicle for generating income. On the downside, they will fluctuate with interest rate moves and have default risk. But they can generate income and serve as a ballast in a portfolio when equity values are volatile. Individual bonds may be difficult to buy, but bond mutual funds and ETFs can offer diversity and make the process easier and more cost efficient.
One of the things that you can do is to create a bond ladder – so you’re investing in bonds that mature at different times or over a certain period. And, as these mature, you reinvest them in a new bond. That way you are constantly earning a return higher than what you may find at most banks and as interest rates change, you are taking advantage of the latest and hopefully highest rates available.
Another option is Treasury Inflation-Protected Securities, often known as “TIPS”. These are designed to increase and decrease with deflation, as measured by the Consumer Price Index. When they mature, you are paid the adjusted or original principal – whatever is greater.
Another strategy is what are called “Preferred Securities” or simply “Preferreds.” These offer some of the better aspects of both stocks and bonds, and generally include a higher dividend rate than general stocks.
However, these do come with two key risks: interest rate risk and credit risk. These may not be right for everyone but when used correctly, they can be a great part of a portfolio.
We’ve talked quite a bit about bonds and other tools, but you can also purchase individual stocks that pay a dividend to help generate income as well. If you don’t want to hold individual stocks, there are even ETFs that offer dividends, which can help you meet diversification and allocation goals in your portfolio.
These are just a few of the strategies you can use to help prepare your portfolio for the lower interest rates ahead. The important thing is to meet with a Certified Financial Planner, preferably one who is independent. Often, large well-known companies will only offer you a few of these solutions. Look at the many options out there, discuss it with an experienced professional, and make the best decision for your financial situation and goals.
If you have questions about your portfolio and how to position it during this period of ongoing low interest rates, we’re here to help! We hope you’ll give us a call at 216-520-1711.