Personal Finances - 2015


What's with the Low Interest Rates? What Can We do Now?

By Mo Vidwans

It is clear that we have suffered because of the very low interest rates offered for savings accounts for so long; it has been going on for 7 or 8 years and the conundrum does not seem to be wanting to end. For those who have witnessed and earned the 14% interest rates in early 1980s, the interest scene today is laughable. There are many reasons for persistent low interest rates (human errors and human greed among others) but we are not going to discuss those here. It is especially heartbreaking for seniors who mainly depend on the fixed income. Well, take heart; the Federal Reserve Board is seriously thinking to do something about it and there are also many other alternatives to explore if you wish to go that route.

Many alternatives to low incomes due to interest rates, but not all, do take you into the stock market and a few people are a still bit squeamish about dipping their toes into that water. Let us make sure we understand this. There is risk in any kind of investing and it is always there, no matter what we do or where we invest.

We also need to understand that there is risk in not investing. It is also known that comfort (risk tolerance) level for each individual is different. But the key thing to realize is that we should look for returns that will at least match the inflation rate so that we will not lose our buying power (even if we may not get any growth out of our investments). That is the real risk we take when we keep our money under the mattress or tucked in a shoebox and that risk is we lose the buying power because of that non-investment.

Today it is possible to get a 1.25% to 2.4% interest on a CD or fixed deposit of some kind where we have to lock up our money, from a year up to 5 years and our investment is insured, too. Many have taken this route but for some that may not be an acceptable return on investments. But for others it may suffice because at least it matches, somewhat, the inflation today.

Bonds, looked upon favorably by many, also are not an investment that is to be recommended at this time (unless you already bought them long time ago when they were at par or below par value) only because they are too expensive and their value would be tending to drop, especially if the interest rates go up now. If you have bought bonds already then try to keep them to their maturity and get their full par value. There are treasuries (or TIPS), I- bonds or bond mutual funds available where your investments are mostly assured but they still do not yield as much.

When we try to balance our peace of mind with high income, preferred stocks (or preferred stock mutual funds) come to mind. They earn good dividends and their stock value does not see much variation as a regular company stock may. They are also higher priority for companies and investors than regular stocks.

If higher returns are desired, preferably in the neighborhood of 3% or even higher, then we would have to look at stable and high value growth stocks (domestic or foreign) that pay steady and decent dividends. There are good stocks on the market that pay dividends up to 6%. Granted now we are looking at some more risk in owning the stock but they also have higher returns or dividends. There is much truth in the statement “higher the risk higher the returns," and we all try to get the maximum return we can with the risk that we can live with. If you are going to lose your sleep over the investments you are making, then you are not doing it right; either reduce the risk or walk away from it.

Still more alternatives would be considering REITs, these are like mutual funds that invest in a specific areas of the market like home mortgages, shopping malls and commercial office space. In other words, they invest in real estate of some kind. Even though they put out good dividends, I would not recommend them at this time because they are fully valued and would not appreciate much for a while.

The last investment idea for good returns is, of course, investing in high value, high growth, low volatile stocks or ownership in the companies that we know well (Apple, Dow Chemicals etc.). This is not for the faint of heart and it is necessarily a long-term investment perhaps towards 5 to 8 years or longer. They put out excellent returns considering the appreciation and dividends together, but they are not for everyone.

Regardless of the returns you are after, the first principle of wise financial management is “to live within the means (income) we have." It is imprudent and irresponsible to not do that. Reducing the expenses is a great way to accomplish that goal since income, no matter what it may be, is generally finite. One way that helps to reduce expenses is if we manage to keep good health. Especially for seniors, according to Medicare data, the health expense multiplies very rapidly in the evening years of their lives. Hence, the health needs to be monitored carefully for controlling expenses. And that goes not just for seniors but for young folks, too.