Don’t Fight the Fed

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How does an investor get income from their hard earned savings?  How does an investor get a high yield return in today’s low interest rate environment?  Well, there is one thing for sure: Don’t Fight the Fed!  This mantra means that investors should realize that high yield is not going to come from traditional savings vehicles correlated to interest rates that are influenced by the Fed (Fed Funds, Treasuries, Prime Rate, LIBOR et al).   Interest Rates haven’t been this low in the U.S. in at least a century and the Fed plans to keep rates low.  When the Fed’s rate setting committee announced the open ended commitment to quantitative easing, “QE Infinity” in Oct. 2012, they set forth their plans to keep interest rates low.

Investors are painfully aware of the following low interest rates on Wall Street investment vehicles that are typically used to provide current income:

  • A 10 year Treasury note yields 1.7 percent a year and a one month Treasury Bill has an annualized return averaging just .05 percent over the past year.  Inflation is running at 2% so you are actually losing money by putting money into Treasuries
  • The average yield for stocks in the Standard & Poor’s 500 stock index was 2.2 percent as of Dec. 2012
  • A Bloomberg REIT index had a 3.5 percent dividend yield as of Dec. 12th
  • The FINRA – Bloomberg Active Investment Grade U.S. Corporate Bond Index yielded 3.4 % in Dec. 2012
  • Municipal Bonds yields are at a 47 year low at 3.3% as of Dec. 2012, Source: Business Week, Dec. 2012

I could keep this list going with all of the investments that are providing abysmal returns including Money Market Accounts, Bank Savings Accounts, CD’s and others but I like to think of solutions not just problems.

Yield choices for Don’t Fight The Fed Investors:

  1. Accept low yields on Wall Street investments, however, for most people, though, being ultra-cautious won’t produce the growth needed to pay for the children’s college or a golden retirement.
  2. Try a Wall Street “Alternative Investment”.  These “Alternatives” (REIT’s, Junk Bonds, Master Limited Partnerships and others) provide a marginally better return in the 4%-6% range, however these investments carry higher risk and are completely correlated to the Stock Market.  If the Market swoons, so does the principal in these investments.
  3. Invest in non-correlatedTrust Deeds that provide a high yield with real estate as collateral securing the investment.  Most investors feel they have to seek safety at the expense of yield.  Well, not with Trust Deed Investments!

What is your strategy to gain yield from your savings?  Please let us know with a post on our website at www.mortgagevintage.com, Facebook Page or our LinkedIn Group.