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How Low Rates Can Be a Killer

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Governor Jerome H. Powell discusses monetary policy accommodation, risk-taking, and spillovers during the policy panel on monetary policy spillovers and cooperation in a global economy: GP_IF_111414_1705

Investors have a short-term memory—they forget what losing money feels like. Do you remember how everyone was reaching for yield leading up to the real estate crash? I do.

A lot of wealthy investors lost big time money trying to lock in a few measly points more than what the risk free treasury was (not) paying. Then the crash hit, and they not only didn’t get those extra points, they lost all of their principal. I’m talking big money.

Then, like clockwork, came the Monday morning lawsuits. Investors cried that they should have been made more aware of the risks they were taking. Some suits were settled, but many were not. It took such a toll on some that it ate up every waking minute of the rest of their lives—which ended, I believe, too soon because of the trauma of losing so much money, so quickly, over such little potential gain.

Wake up.

History repeats itself. If you’re getting above average rates, you’re taking above average risk, and all of the potential heartache that can come with it.

Jason Zweig writes in The Wall Street Journal:

A good yield is hard to find.

With interest rates so close to zero across the board, many investors are undoubtedly wondering whether they can afford to keep a portion of their portfolio safe.

In fact, you can’t afford not to.

Since the Federal Reserve is depressing interest rates, it seems only fair that I should depress you. So please allow me to point out that $100,000 in a savings account will earn, if you’re lucky, $220 in interest income in 2020. That’s $1,509 less than you would need to outpace inflation this year, estimates J.P. Morgan Asset Management.

As recently as 2010, the yield on your savings account would have nearly kept up with the cost of living. For most of the years from 1985 through 2007, the return on cash resoundingly beat inflation.

Today, at banks, the national average interest rate on savings accounts is 0.16%, according to DepositAccounts.com; the average one-year certificate of deposit yields 0.46%.

U.S. investors have amassed $4.79 trillion in money-market funds, says Crane Data, a firm in Westboro, Mass., that tracks cash accounts. Yet the average money fund yields a piddling 0.03% in interest income. In the third quarter, reckons Crane, investors pulled $238 billion out of these funds. Yield is so hard to come by that several asset managers have begun shutting down tax-free money funds.

Investing for income in this environment is like trying to squeeze water out of a fistful of sand at high noon in Death Valley. The standard advice from pundits and financial planners is to squeeze more desperately: If you take a lot more risk, you can wring out a little more income.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.