Desperately Seeking Yield

Investors are perplexed and concerned about continued low interest rates.

People who think of themselves as conservative investors like to rely on guaranteed fixed interest rates. Over the last six years that hasn’t been much fun.

In early 2009, the Federal Reserve Board lowered their short-term interest rate target to close to zero and it’s remained there ever since. It seems hard to believe but as recently as early 2008, the target was 4.25 percent.

Investors’ choices in this environment are unattractive: they can accept little risk and interest rates of close to zero or take on different kinds of risk.

Many investors refuse to take on risk. In fact, by some estimates as much as $3 trillion is invested at negative interest rates. With a negative interest rate it means that the investor is paying the issuer or custodian to hold their money. They’ll get less money back than they put in.

In a world of seemingly low interest rates forever, investors will take increasingly “clever” or risky moves to get higher yields. They may not recognize the risks until it’s too late but the risks are there. Prudent assessment of risks and an overall plan are the best ways to survive this period.