Welcome to the holiday season and year-end planning. Many take this time to assess their family’s estate plan, consider Roth IRA conversions, and make final contributions to employer retirement plans.
Something on our plate a lot this year is finding yield on conservative investments. Over the last decade, many have become accustomed to generating 1.5 – 3% on generally conservative investments such as savings, money markets accounts, certificates of deposit (CDs), and low risk bonds. Since the 2020 correction, yields suddenly crashed and people sought returns on lower risk investments. This may be one reason the stock market continues to grow as many investors have settled for dividend yields instead of low rates on their savings. Also, more cash and cash equivalents are in the market than ever before.
Due to CD maturity rates at all time lows, we have provided more fixed annuities this year than ever before. Many fixed annuities are still offering 2 – 2.5% guarantees over a 3 to 5-year period. While this may not sound like much, CD rates dropped from almost 2% last year to 0.3 – 0.5% this year. The second advantage they offer is tax-deferred growth rather than a 1099 on interest earned each year.
What about the bond market? For the first time in nearly 40 years, the bond market overall has been negative most of 2021. Why is this the case? Interest rates began declining following the peak of the early 1980s (remember those absurd mortgage rates?) and have remained since, making bonds a safe way to de-risk a portfolio. Bond prices have an inverse correlation to interest rates. When interest rates decline, bond prices increase and vice versa. In recent years, interest rates have bottomed out, and over the next decade or so, they may begin to normalize. When that happens, bond prices typically decline, which hasn’t been seen in many years. Many investors with bonds in their portfolio are beginning to see this underperformance, and from my estimation, will continue for the coming decade or more.
Another place to find yield outside of fixed annuities or stock dividends are structured bank notes. This is becoming a popular alternative investment for income yields. Investors can purchase market-linked CDs or notes tied to market indices, like the S&P 500, Dow Jones, or Nasdaq. Banks offer a certain percentage of downside principal protection and a certain percentage yield to hold the note, typically between 1-5 years. In many cases, this could be between 4 – 6% yield on moderately conservative options.
Lastly, we look at the fixed indexed annuity marketplace as a bond alternative. While most people think of annuities for income guarantees like a pension, the insurance marketplace has developed annuities to compete for conservative growth. In this case, investors need to look for no or low-cost fees and no caps on potential growth. These can completely protect investors’ principal and typically target a 4 – 6% growth rate in the long term, making it a good bond alternative in a rising interest rate environment. There are many options and factors in this space, so work with an independent advisor to sort through what’s in your best interest.
For a complimentary financial planning evaluation, reach out to Advanced Wealth Strategies here on the site, also conveniently located in Cornelius at 19520 W. Catawba Avenue in Cornelius, NC. Feel free to call or text (704) 765-3653 or email contact@PlanWithAWS.com. As fiduciaries, their independent firm will prioritize your best interests.
