Fixed interest investments no longer make sense
Fixed rate interest investments are a staple of recessions as investors turn to conservative investing strategies to protect their capital. CDs, Treasuries and money markets have returned the most since the year began but as investors pour into fixed income and government backed investments, yields are dropping rapidly.
Courtesy of BankRate.com
In just one week the average interest rate on longer term deposits dropped the most by drop in annual return. Banks are beginning to see huge demand for longer term CDs to lock in interest rates and are betting that the Federal Funds rate and their borrowing costs will be low for a very long time. (The LIBOR rate keeps falling suggesting that more liquidity is making its way to the market)
But with Treasuries paying just .01 and .03% on the one month and three month treasury, and CDs paying less than bank accounts did just one year ago, it makes very little sense to throw any further money at fixed income. Here are just a few reasons why:
Inflation is high
High inflation easily wipes away the return generated from fixed income investments. When the FED is pumping money into the market, do you really want to be holding cash? Virtually every commodity traded on the open market is set to rally when the world figures out just how many dollars have been created to fight the credit crunch.
Fixed income means fixed investment period
Here comes a piece from the higher economic playbook. Considering that you could A: lock up your money for a year to make 2.6% or let the money sit on the sidelines and make about 1% per year in a bank account? Your opportunity cost is just 1%, what would happen if you wanted to get in when the market rebounds but instead you’re all in locked investments? Don’t lock in your money now, not after months of recession. The recovery, or short term bump, should be right around the corner.
Fees
Mutual fund fees make fixed income mutual funds a joke. Why bother paying someone 1% to manage your money when you’re only making 2% per year to begin with. Conservative investment approaches work horribly when combined with high fees of mutual fund management.
Now is simply not the time to be locking up investment capital, its time to free it. The bottom will be a knock of opportunity on the door of every investor but it will all come down to who is most liquid and able to buy in at the bottom.
