My Cash is Earning Zero. Should I Change My Approach?
Dan Sinnen, Vantage Partner & Senior Wealth Advisor
With interest rates historically low, you are probably asking yourself, “How can I get more yield out of my bond and cash investments?” There are many alternatives that come to mind. Should we move safe bonds into blue chip stocks that are paying higher dividends? What about alternatives like Real Estate or gold? Although these alternatives can bring higher yield and interest payments, we need to focus on the reason we keep a portion of our money safe.
We know the stock market can be volatile (we are seeing this right now!). We often overlook the purpose of a fixed income bucket – for times of uncertainty. It is impossible to predict when the next financial crash in the markets will happen. Having safer investments allows us to live through the volatility in case something happens. It allows us to continue our income stream. It allows us to breathe and prevents drastic emotional decisions.
There is a purpose for creating a diverse financial toolbox. We have stocks for long-term growth, and fixed income, bonds and cash for short-term uncertainty. When we change our behavior to greed, we significantly increase our exposure to potential consequences. Let’s look at blue chip stocks as an example. The current dividend on IBM is 5.63%. This looks great compared to our bonds that are yielding 2.36%. However, what we often lose sight of is what is the risk of adding that additional 3% of yield. IBM was down over 6% one day this week. We need to look at the bigger picture. When we have a sound financial plan, we consider all variables: low interest rates, high interest rates, and inflation. Some may think there is risk in keeping our fixed investments as they are with such low yields; however, there is a greater risk if we don’t.
Before we look to chase higher returns, remember to look at the bigger picture and how that could impact your plan. At Vantage, we believe a consistent planning strategy is what drives us to success. There will always be variables that come along the way, but that’s why we’re here to walk alongside you as your trusted partner.