For Mark Roberts’ Use:
For the past three years, interest rates have remained at exceptionally low levels, and are expected to continue this way until at least the end of 2014. On the other hand, market volatility has been high, creating a challenge for risk-averse investors who hope to improve their returns.
For those approaching retirement, capital preservation is important. However, the portfolio needs to outpace inflation in order to last throughout the retirement years. When creating an investment strategy, it’s important to factor in the prospect of continued low interest rates. But how?
Cushion with cash. With interest rates remaining low, savings accounts, CDs, and money market accounts don’t offer much income potential. However, their stability makes these types of accounts important in mitigating the impact of market volatility. In order to handle unexpected expenses, keep some cash reserved in liquid accounts. This will also preserve some available money in case of future investing opportunities.
Brace with bonds. Even with low interest rates, bonds may play a part in your portfolio, but choose them utilizing the same discretion you would use if rates were higher. Bonds with longer maturities may offer higher yields, but that money will be tied up in the event more attractive interest rates emerge in the future. This is a decision to weigh carefully, since it implies the risk of missing out on a better opportunity later on.
Dividing into dividends. For those who are wary of investing in a volatile market, one option is to focus investments toward well-established companies who pay dividends. US corporations currently hold a near-record amount of cash reserves, and many increase dividends when they hold excess cash. Dividend-paying stocks can be less volatile, and by reinvesting dividends you can increase the potential for total return over the long run. Since future dividends are not guaranteed, however, this is a decision to weigh carefully with your financial advisor.
1) Federal Reserve, 2012
2) Yahoo! Finance, 2012
3) Time.com, January 18, 2012
4) The Fiscal Times, February 10, 2012