Lower risk investments are becoming more popular now that interest rates seem fixed at historic lows.
Remember the thrill of bringing your savings account book to the bank when you were a kid? They would stamp it and — ta-daaaa — you had more money than when you walked in.
Fast forward to today. Most of us don’t get that giddy feeling after making a deposit with the so-low-it’s-not-even-worth-it interest earned on traditional bank deposit accounts like savings accounts, money markets and certificates of deposit.
Let’s look at CDs as an example. The maximum yield on a 12-month CD rate is about 1.3 percent with a 5-year CD being about 2 percent. Necessary disclosure: Rates vary from bank to bank and can change on a regular basis. For the latest rates, see our savings rate page. Perhaps these are nice yields for the risk-averse saver, however, inflation (the increase in prices) means your net value is about 0 percent. We love zero percent on the debit side of the ledger, but not too many people are big fans of it on the earnings side.
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Many people remember the good old days, at least from a financial standpoint, of the eighties. Many people took for granted double-digit interest yields on their bank deposits to help finance a rise in mass consumerism. Today, personal bankers are frequently asked when will customers see a return to those rates or at least something in the 5 percent range. The immediate answer is: not anytime soon.
So what are some ways to combat a low deposit rate environment? The easiest answer is to park your money in lower risk investment instruments, such as bonds and secondary market CDs. The key phrase here is lower risk. But those are not your only options.
Here are five lower risk investments to discuss with a wealth adviser in order to earn more yield than a typical bank deposit account. (Many banks have a wealth management unit that offers a wide range of investment services to its customers. Wealth advisers can devise a personalized investment plan by asking you questions, looking at your savings goals and liquidity needs, and by determining your risk tolerance. Even if you feel you are a “saver” rather than an “investor,” it doesn’t hurt to talk to a professional just as you would with your personal banker.)
T-notes earn a fixed rate of interest every six months. Auctions are held monthly on 2-year, 3-year, 5-year and 7-year notes and original issue 10-year note auctions are held four times a year. Individuals can buy treasury notes directly at treasurydirect.gov or with the help of an adviser. Recent auctions for the 7- and 10-year notes produced interest rates of 1.625.
30-year treasury bonds
These bonds typically pay a higher rate of interest than short-term treasuries because of inherent risks with long-term maturities. However, these investments are relatively safe because the bonds are backed by the U.S. government. Recent issues of these bonds have seen interest rates between 2.5 percent and 3 percent. You do not need to hold the bonds for the 30-year duration. You can sell them at any time without penalty.
High credit-quality investment grade corporate bonds
Corporations issue bonds to raise money for their business. When you buy bonds, you are lending money to the corporation in return for an IOU, which has a set term, typically five or 10 years. Bondholders are paid a coupon or interest each year until maturity, at which time your initial investment also is paid back in full. To mitigate the risk of the company going bankrupt, risk-averse investors will typically purchase high credit-quality investment grade bonds with AAA or AA ratings. Lower rated bonds may pay higher coupons but also carry more risk.
These certificates of deposit typically earn more interest than a CD purchased at a bank because they are issued in a more competitive market. Offered by your bank’s wealth unit or your personal financial adviser, these CDs are still insured by the FDIC up to $250,000 per individual account but are purchased in a secondary market. Many investors like to ladder CDs by purchasing them in increments like 3-month, 6-month, 9-month, 12-month, etc. This strategy can provide more liquidity than purchasing longer-term CDs.
“Munis” are bonds issued by government entities, like school districts and cities, to fund capital projects and day-to-day obligations. Like other bonds, issuers are rated so the lower the risk of default by the government entity, the higher the quality of the bond. Investors like municipal bonds because they are tax-exempt but also are backed by a taxing body, which helps mitigate default risk.
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While most investments carry a certain amount of risk, the key is making sure you are fully informed. Doing your research and asking questions can help determine whether lower risk investments will work for you. You might even see a little more of that giddy feeling return.
Have you used any of these products? Tell us in the comments section below.