HOW TO GUARANTEE A LOSS: Buy 5-Year CDs

Standard

With interest rates being low for over a decade, it’s tempting to buy long-term products that pay better interest. A lot of investors will look at 30-year Treasury bonds, 5-year CDs or even long-lock-up fixed annuities.

Most of those actions are just about the worst thing you can do with Fed rates being near zero. You’ve probably heard of the seesaw relationship between interest rates and bond prices. One’s up, the other’s down. And vice versa. If you buy a 30-year T-bond, or other long-term bond, at low rates then the chances are very big that you’ll lose principal value when rates move up. Bad timing and low or negative returns.

With the CD or fixed annuity options you probably won’t get hurt. You’re not going to lose principal but you will be locked into rates that likely won’t meet or beat inflation. That means you have a real loss due to a consistently weakening dollar (inflation). A guaranteed loss.

Specifically, if you buy a 5-year certificate, with the current average yield of 1.56 percent, then you’ve lost ground to the average 3% inflation we’ve experienced. And that’s just the government figure for inflation. We all know, when you include food and fuels, real inflation is commonly believed to be even higher. So an investor needs to earn even more to really keep up and grow. But it’s possible.

Also, the fixed annuity could lock you into fees that last 4-7 years or longer. Beware of the exit details.

What’s one solution to low interest rates? Buy “alternative” bonds that have minor impact from rising rates. There’s a lot of different types out there. Also, invest overseas, add more risk categories (like real estate) and seek out sustainable, high-yield investments. Visit my site, RetireIQ.com, and request an appointment. We’ll talk about the details.

 

Advertisements

Will a Dollar Crash Cause a “25 Year Depression”?

Standard

I was on a website last Friday and saw an ad. I rarely click on ads but I couldn’t resist. The headline mentioned something about a 25-year depression. That’s a pretty bold claim. And I know there’s about a million of these outrageous claims on the internet. But what if??

So I clicked on it and started watching a video by Jim Rickards. He sounded pretty qualified despite the puffed-up claims to expertise. And he mentioned something I had read about before that really could be catastrophic: the world going off of the U.S. dollar.

I had worried about this for my kids and future grand kids. But I didn’t think it would happen too soon. Yet it could happen and it wouldn’t be good for America.

To oversimplify the issue, when the world completely drops the U.S. dollar as a reserve currency it will make the price of what we consume at home hugely more expensive. So we can then either consume less or finally start selling more. Or both.

The consume less part would happen right away. We would be forced to do that. Our weak dollar simply wouldn’t buy as much imported stuff (apologies to my high school teacher for using ‘stuff’ as an actual noun).

And we are, thankfully, already starting to sell a little more. Mainly fuels due to the dynamic oil/energy sector.

So it’s a worrisome problem. And it got me thinking: would the world just drop our currency overnight? Unlikely. It’s similar to the holding of our Treasury bonds by foreign investors. They wouldn’t want to sell these bonds all at once, dumping us. That would be horrendous for the values of the bonds. They would all lose billions & billions of dollars. Similarly, dumping the U.S. dollar would hurt the countries importing to America, namely China and other low-cost producers. Not to mention all of the European importing countries and Japan.

Would you harm your biggest client? I don’t think they would either. Everyone sells to everyone in this global mix. So the international community has a vested interest in seeing a slow removal from the dollar. If there’s a removal at all.

What can an investor do? You can increase your international exposure. If you use mutual funds you can get many that are denominated in those foreign currencies. Not only would you be diversifying your portfolio you’d be creating some “currency insurance” within it, too.

Check out this article for another way to diversify out of the U.S. market and dollar: Investing In Stuff