When you opened your money fund statement and saw that you earned 0.04% last quarter, did you feel newly confident about your retirement? I’m guessing no.
After you subtract for inflation, investment returns on most money market funds are now negative. Factoring in cost-of-living increases, most of us are actually losing money in our money market funds.
And that’s where many of us have a significant portion of our savings. These funds now yield, on average, less than one-tenth of 1% annually. That means a $100,000 IRA account won’t even earn $100 this year, or less than $10 a month.
If that makes you feel less than comfortable, it seems you’re not alone. In March, $160 billion flowed out of money funds, the biggest monthly withdrawal since the September ’08 market debacle. And that’s on top of the $540 billion taken out of money funds in ’09. Money fund assets have dropped 24% since January ’09. It seems that some of us got fed up earning a return of virtually zero, and took our money and ran. But where to run to? Where do we put our money now?
The Fed Funds rate—the overnight bank lending rate upon which most other interest rates are based—has hovered between zero and 0.25% for more than a year. As a result, interest rates have nowhere to go but up. The Federal Reserve Bank has kept rates at bottom-of-the-barrel lows for more than a year, in the hopes of turning around the economy from its worst recession in 70 years. But interest rates at virtually zero have serious implications for personal investment decisions. Because rates must rise sooner or later, bonds (corporates, munis, treasuries) are probably the worst place to invest right now.
When rates go up, the value of a bond declines because the bond has locked in a low rate of return. The outlook on stocks appears only marginally better, with equities looking somewhat overpriced now. The S&P 500 is up 80% since March ’09 without a correction of even 10%. We are overdue for a slide in price. Because rates have been so low for so long, a steamy broth of inflation is brewing, set to hit us at some point in the future.
In the beginning, the increase in inflation will feel good: greater business investment leading to more hiring, (temporarily) rising equity prices, more government programs, etc. But after inflation becomes embedded in the system, it will feel like the hangover that never goes away: taxes go up, deficits rise, equity and bond prices fall, and none of the traditional fixes solve the problem, at least not without a lot of pain first.
One of the worst effects of rising inflation is loss of purchasing power. Your paycheck buys less and less each month, and your IRA doesn’t even keep up with cost-of-living increases.
One way to keep inflation from eating away at savings is to own “real assets.” Real assets are hard assets, versus financial assets like stocks and bonds. Things you can touch and hold, like your house, your gold, your art, your diamonds, your, um, barrels of oil… These are the investments that do well during an inflationary cycle. In addition to outperforming during inflationary periods, real assets are a great hedge against a weak currency, like, say, the dollar.
There is a global scramble for return on investments; everyone is looking for the safe haven for their money, and the supply of real assets is finite. There is no new real estate on the planet that I know of; gold can only be mined at a slow, steady rate, and we all know about the dwindling supply of oil around the world. The global pursuit of inflation insurance will drive up the prices of these hard assets. When and how to invest in real assets can be challenging. Because our financial markets instantaneously assess any and all future risks, many commodity prices have already risen, some dramatically. However, there are always corrections, which can be seen as buying opportunities.
Yes, gold prices are up, but there will be pullbacks, before gold eventually goes higher. The same can be said for oil, other precious metals, and even real estate. Timing in these markets is everything. While I don’t expect anyone to follow price charts daily, it couldn’t hurt to become more aware of asset prices and to perhaps shift a chunk of money when a potential opportunity arises. The years to come will bring even greater uncertainty and market volatility, and we all need to be prepared to take advantage of these opportunities.
So what exactly is in this Affordable Care Act, and how do you get accurate information about the phase-in of benefits? And what provisions directly affect women over 40?
The super committee has failed to reach a debt-reduction deal, pretty much as expected. So where do we go from here?
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Wonderfully written piece! I learned a great deal from your article and plan to do more research on real assets that might compliment my investment portfolio.
Kath—–you’re probably too young to remember the great hard asset market of 1978-1981! What a wonderful time it was—-People were crazy for gold, silver, diamonds, gemstones. Money was less than garbage. Many people thought they could buy gems and diamonds for ‘investment’ and sadly learned that such specialized items require specialized knowledge and network to resell at a profit. A one carat D-Flawless (the best you can buy) diamond sold for $65000 wholesale at the peak in 1980.
Today that diamond is around $24000 wholesale—-30 years later. I knew diamond dealers who had bought such items at the peak of $65K in 1980, only to have to sell them at less than half by 1981. They kept holding, hoping they would bounce back as the media commented back and forth about the up and down state of the economy—–kinda like now. D/FL diamonds eventually hit $14000 and stayed there pretty much until this century. I could tell you even more stories about rubies, sapphires, etc. Don’t get me wrong though—these items are great investments if you know how to buy and sell—it’s just that most people don’t.
If you think about it, most people don’t know much about making money at all. They read about how wonderful something is (like real estate, gold, oil, etc) and get convinced by media frenzy that they can make money too! Except the media reports late in the game—where was the advice to buy gold when it was $250-300, platinum about the same? Oil at $10?
Same with most stocks written about——-But hey, go for it. I’d love to see another gold and diamond rush!
Wow Kathy, that’s a great education on the mechanics of our financial markets.
Thanks for putting it all together for me.
Now if I can just remember where I put those oil barrels…
The author has left unanswered the question of precious stones
or jewelry as hard assets, and the pros and cons thereof
Kathy,
This is a well thought out and clear explanation of the next wave of financial calamity and how we can think about hedging our losses from the loss of buying power from the dollar.
We are grateful for this clear explanation and the reminder that we can not just stick our few assets under the mattress any more.
We look forward to regular pieces on this important aspect of women’s lives over 40: preparation for the future by making intelligent, not risky choices, but understanding how we can avoid losing money with safe investments as well.
Patricia Yarberry Allen, MD
Patricia Yarberry Allen