“Lower for Longer” Interest Rates in the Era of COVID
A little over a year ago, we shared how low and negative interest rates could impact investors. Has anything changed? Well, since then, we’ve been contending with a global pandemic.
Based on comments made by both Federal Reserve Chairman, Jerome Powell, and retired Federal Reserve Chairman, Janet Yellen, about the Federal Reserve’s and many of the world’s Central Banks’ mantra being “lower for longer,” it is likely that interest rates will stay low for the foreseeable future.
What do low interest rates mean for investors, and how low can interest rates go anyway? Although uncommon, they can go lower than you might think. In Japan, the interest rate is already below zero – meaning that you’ll get back less than you invest.
Even though U.S. interest rates are at historic lows, they’re not at zero. However, if you offset a low interest rate with a higher rate of inflation, they may as well be. Getting 1.5% interest on an investment, offset by a 3% rate of inflation, means you receive a net negative rate of return or a negative “real yield.” Even a tiny bit of inflation can impact your earning power.
Low interest rates mean that while it may be less expensive to finance large purchases, like a car or home, it also means potentially lower returns on certain types of investments like bonds, CDs and other savings and investment vehicles.
So how can an investor earn higher income in a low interest rate environment? Alternative investments might be one of the best… well, alternatives.
Alternative investments include, but are not limited to, investments in real estate, hedge funds, private equity, commodities, marketplace lending and precious metals.
Once perceived to be only available to institutional and ultra-high-net-worth investors, an increase in technology-enabled platforms and investor awareness has allowed for these alternative asset classes to expand and become more accessible to the average investor.
One feature of alternative investments is that such investments are not generally “marked to market,” meaning that they don’t fluctuate in value based on the stock market. Alternative investments are not valued daily like investments in the public markets of the NASDAQ or the NYSE. This does not mean they won’t change in value, but they aren’t likely to be as volatile as stocks can be, based on the latest news report.
If you are considering investing in any kind of alternative investment, it is imperative to work with an experienced team of professionals. It’s important to work with a custodian who performs the necessary due diligence on each asset, in order to have confidence in your investment choices. It’s also important to always consult with an investment, tax and legal professional before making investment decisions.
Ready to learn more about alternatives? We have created our Knowledge Center to help advisors and investors discover the basics of alternative investing and how alternative investments can be part of your retirement portfolio in an IRA.
The material in this blog is presented for general informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal or tax advice.