With the steadily declining interest rates of the 21st century, you may be wondering what to do with your money when interest rates are low. This trend is seen starkly when you compare the 6% rate of the US federal funds rate at the beginning of 2000 to the rate as of December 2020: 0.09%. The Federal Reserve estimates that rates will most likely remain near zero until at least 2023. If you are a retiree, this can impact your investments and cause concern. Let’s look at a few options you may have in a low interest rate environment to make the most of your money.
How To Make Money In A Low Interest Rate Environment
It can be difficult to know how to invest when interest rates are low, but there are some options that might be right for you. One option to consider is to look at your savings account and think about shopping around for an online savings account. Traditional savings accounts usually pay the same annual rate as the monthly yield on Treasury bills, which is currently fairly low. Online savings accounts can offer a higher yield due to their lack of overhead. It’s important to make sure that the online bank is FDIC-insured to minimize your risk.
If you’re looking at a fixed income low interest rate environment, then you might want to consider a certificate of deposit (CD). You may be able to receive a higher rate on your CD, which will remain constant for the entire term of the CD. These certificates of deposit can range from one month up to five years, with longer CDs paying higher rates. There can be a downside to CDs, however, since the locked-in rate stays the same regardless and interest rates could potentially begin to climb during that time. There are a few options to mitigate this risk, with bump-up CDs that let you increase the rate during the term and no-penalty CDs that allow you to withdraw your money before maturity without a fee. Another strategy is laddering your CDs, where you buy certificates with a variety of maturity dates.
What should you invest in when interest rates are low?
In addition to these options of how to invest in a zero interest rate environment, you could also consider bonds. A bond is basically when a company or entity gets money from investors instead of taking out a loan from a bank. Bond investing in low interest rate environment can provide diversification benefits, and waiting for rates to rise can cost you, since bond yields fall as interest rates rise. Like with CDs, you can ladder your bonds to increase your liquidity. Some bond options to consider are:
These bonds are issued by cities, countries, or states in order to finance public construction or infrastructure projects. In addition to the potential for a good return on your investment, municipal bonds are also exempt from federal, state, and local taxes for investors who live in the state issuing them.
One thing to be aware of is that these bonds usually have a stated interest rate that is lower than that of other types of bonds. However, due to their tax-free nature, municipal bonds are comparative or can be more advantageous than other bonds when you factor in the taxes you will owe on those returns.
Municipal bonds come with a letter grade from an independent credit rating agency. The least risky ones are considered to be the general obligation bonds, since they are backed by the government body rather than the anticipated revenue from the specific project.
Corporate bonds issued by companies seeking capital carry a higher risk than US Treasury bonds, but can offer the higher yield that you are looking for. These bonds are typically considered reasonably safe from default, as long as you invest in companies with solid financial histories. Like municipal bonds, corporate bonds will have a letter grade from an independent credit rating agency - the least risky bonds have ratings of AAA to BBB.
High-Yield Bond Exchange Traded Funds (ETFs)
When investing in a low interest rate environment, one tempting option is to seek out bonds that are rated below BBB since they have better interest rates. These bonds can offer dividend yields from 6% or even in double digits. High-yield ETFs are known as “non-investment grade” or some are even known as “junk bonds,” due to the greater risk of default compared to other types of bonds. You may decide that the risks are worth the rewards, although it would be wise to consult with your professional money manager to make sure you are considering all the pros and cons of taking this route.
Defined Maturity EFTs
Another option to consider is to invest in a defined-maturity bond exchange traded fund. The way this works, is instead of investing in an individual bond and holding it until maturity, you can invest in a defined-maturity bond ETF, which is a single fund that invests in thousands of different bonds. Once the stated maturity time is up, the fund closes and the net assets are distributed to each individual investor.
Depending on the type of bonds that are held in the fund (corporate, municipal, high-yield) and the maturity (ranges from one to ten years), you will see different ranges of yield.
Take The Guesswork Out of Low Interest Rate Investing
Here at Delta Wealth Advisors, we have a team of advisors who will fight for every edge in our clients’ finances. Low interest rates can cause concern, but you will be in capable, dedicated hands at Delta Wealth. Your money should work for you, not cause worries, and our advisors can help you make the right moves to set you up for success. Contact us today to discuss what options are right for you in a low interest rate environment.