Captive to these low-yielding investments?

Today’s savers are earning next to nothing on their commercial bank deposits, which at the end of October stood at $9.6 trillion outstanding, money that every day is losing ground to price inflation. There is another $2.5 trillion sitting in money market funds, also earning next to nothing.

To be sure, investors who place money in a bank or mutual fund do so with good reason: To preserve their capital and to keep it liquid. The older we get the more we elevate these priorities. Today, for the 80 million Americans who are aged 55 and older, these are high priorities.

Yet investors are not captive to these low-yielding investments. So, how is an investor to break free? First, grasp that today’s low savings and money market rates will likely persist for a long time - for years. The Federal Reserve has made this clear, projecting that its policy rate, that rate by which so many short-term interest rates are set, will be at just 2% at the end of 2016. It might be until 2018 or beyond before the Fed returns its policy rate to its long-run historical norm of 4%.

Should you believe the Fed? Yes. Its credibility rests in large part on keeping its word, and it is currently providing clear guidance on the likely path for its policy rate, providing markets with economic conditions that the Fed wants to see before it raises interest rates. By most expert opinions, these conditions will not be in place for at least two years.

So, once you have cried “uncle” and given in to the likelihood of persistently low rates, you can take action. Here are a few ideas:

• Consider moving money out of bank deposits to short- and low-duration mutual funds and ETFs. Stay mindful, however, of your cash needs, allocating money that you believe will stay invested under most circumstances. Yields are not high and there’s some market movement, but the return prospects are favorable given the outlook for monetary policy.
• Consult with your financial advisor and ask about the many income funds that have been developed in recent years with the aim of boosting incomes in non-traditional ways, including by investing in dividend-yielding equities and mortgage-backed securities, among other instruments.
• Consider “absolute return” strategies, whereby active managers utilize their skills and select investments on the merits rather than because they are tied to an index. These fall into the bucket of so-called “liquid alternatives.”
• Avoid longer-dated maturities (beyond 10 years) where slowly rising interest rates put your capital at risk.
• In sum, ever mindful of safety and liquidity, note that there are $100 trillion of bonds in the global supermarket of bonds. Go shopping! The days of growing your capital through passbook savings are of a bygone era. 

Source:  Tony Crescenzi, Executive Vice President, PIMCO
From a presentation delivered at the American Association of Individual Investors Conference

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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