Tough Times for Conservative Income Investors

JP Morgan Asset Management recently released the Q3 2017 update to their Guide to the Markets, which is another of those resources worth bookmarking for future updates. Some folks put a lot of time and energy into it, and it contains a lot of interesting charts and graphs. Here’s just one that caught my eye.

I consider myself a relatively conservative income-oriented investor, and this chart shows why it’s been a tough several years to be that type of investor. For much of the last 30+ years, you could have put your hard-earned money in an FDIC-insured certificate of deposit and enjoyed a guaranteed return above inflation. This isn’t even when shopping around for the top rates, just taking the average bank CD rates.

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Nowadays, you’re just trying to keep the bleeding to a minimum, jumping at the chance to grab a 3% APY long-term CD that might just keep up with inflation.

This also partially explains why the stock market keeps going up and up. Which would you rather have?

  • FDIC-insured cash savings that gives you $1 in annual interest per $100 invested, or a
  • S&P 500 ETF with a 4% earnings yield and 2% dividend yield? In other words, a basket of companies that for every $100 invested earns $4 a year in profit and out of that gives you $2 a year in cash dividends?

I really can’t complain as my overall portfolio of stocks, bonds, and bank CDs has more than doubled in the past several years. Yet, I also share that vague feeling of uneasiness with many other investors.

Comments

  1. Its not tough times. Its Financial Terrorism. And our passive acceptance of being robbed by the criminal elite and their lap dogs over and over again from the Savings & Loan Scandal to the plundering of the Social Security Trust until today are as much our own doing as anything else.

    I don’t think Janet Yellen or Ben Bernanke are worried about making ends meet on 1.15%

  2. I’ve sold anything mortgage-related, like Vanguard’s MBS fund (VMBSX). If the Fed starts selling assets, or if Congress minimizes the deductibility of jumbo mortgages, then it seems MBS and long-dated bonds might suffer a hit.

    I’m still long Macy’s (M), Fred’s (FRED), and will buy Limited Brands (LB) today or tomorrow. The dividends on some retail and REIT stocks seem too good to be true, but as you said, with CD (and bond rates) so low, allocating more cash to dividend-paying stocks seems like the right move.

    The real test for stocks will come in December, when the Fed is expected to hike rates. I personally don’t see a hike happening in December 2017, but I do think one or two will happen in 2018.

    Disclaimer: nothing herein is to be construed as investment advice. You are responsible for your own due diligence. I own M, ANF, BBBY, FRED, and TGT, but my positions may change at any time. I expect to own LB soon, but my positions may change at any time.

    • That they will hike rates is a given – just how much is the question.
      I think the Fed is still dovish rather than hawkish – they will raise rates by like 0.5 – 1 % but I dont see a dramatic rise enough to push CD rates into attractive-territory

  3. This chart shows that CDs have been a terrible investment for over a decade. The result of this is that the rich keep investing in stocks and get richer while the poor get poorer with any money that is in a savings account or CD.

    Eventually rates will rise to a level where CDs are worth investing in. However stocks still provide the best near term value. Also over the long run their historical 7% gain cannot be beat by CDs.

  4. Steve Kohn says:

    This shortchanging of savers (like me) seems to be intentional. There are millions of us. Why haven’t our voices been heard by now?

    • Because no matter who you elect they are beholden to wall street and the federal reserve.

      It’s even worse in parts of Europe and Japan with interest rates at or below zero, yes negative rates.

  5. Truthsayer says:

    Part of “wealth effect” strategy.

    Low Interest => Asset Inflation => Your Home Value Goes Up => Makes You Believe You Are Richer => You Spend More Than You Should => Economy Accelerates => Corporations Make More Money => Rich Investors Get Richer While Middle Class Wonders What Happened….until they finally realize that they are poorer

    Unsustainable? Yes. That’s why every 7~10 years they do a fast reset and play the game all over again.

  6. Truthsayer says:

    Doing The Math on home value with low interest rate hurts middle class savers…

    10% interest with $300k mortgage you paid off after 30 years => You can sell the house and retire living on $30k annual interest.

    1% interest with $1M mortgage you paid off after 30 years => You can sell the house but will need to live on $10k annual interest.

    So do you really want a fed policy with low interest and $1M home?

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