Scary Financial Times

Submitted by Guy Williams on October 7, 2020

These are difficult times. The economic recovery is slow; unemployment is stubbornly high while interest rates are very low. In the meantime, most of us are stressed by the shutdowns and apprehensive about the normal winter flu season.

 

All of this uncertainty and worry can lead to unfortunate financial decisions.

 

The first bad decision is unreasonable yield chasing. The Federal Reserve has said that they intend to keep interest rates low for a long time. What does a long time mean? As Eeyore, the pessimistic grey donkey in the Winnie the Pooh stories said, “days, weeks, months, who knows?”

 

We have long recommended a certificate of deposit ladder with certificates maturing over a period of years so that if rates are low when one matures, you will not be stuck reinvesting all of your liquid cash at one time in a low rate environment. This is hard to do, I know, because I only started following my own advice on this subject two years ago. We still recommend creating a CD ladder, even in this low rate environment.

 

Faced with very low rates, folks sometimes go for very long maturities to get a little more yield. If rates do begin to rise, you may then be stuck with investments that must be sold at a loss if you need liquidity. Occasionally people are lured into very risky, even fraudulent investments. If you listen to some business radio commercials, there is supposedly a real estate trust with A rated properties paying 10% interest guaranteed. There isn’t. Yields that high mean serious leverage and very real danger of default. Unfortunately, at this time, yields much above 3% with any degree of certainty are very, very rare.

 

If you are promised a high yield, there will be risk, and in some cases outright fraud. Because of the very low interest rate environment, normally skeptical people have been fooled into making some dangerous and risky investments. If it looks too good to be true, it usually is too good to be true. In these times, a low but sure rate of interest is better than losing money.

 

The second big risk is jumping into a much-overvalued stock market because you are told that everyone else is doing it and you might miss out. Something is wrong with the stock market now. Values are very high compared to the long-term averages. We still recommend a steady investment in value stocks. We would not chase stocks that have appreciated rapidly like Tesla and Apple.

 

Investment principals remain the same. Plan to buy good stocks or mutual funds on a regular basis, preferably monthly through good times and bad. Buying stocks with no revenue and unrealistic valuations is not investing, it is gambling. The process of steadily buying stocks over time is called dollar cost averaging. Dollar cost averaging is a great long-term strategy, stick with it. This is not the time to rely on strangers for financial advice. Without local connections, these outsiders can operate without accountability. We recommend using a financial advisor connected to a reliable financial institution.

 

So, since yields are low and stocks may be overvalued, stick with what you know. We recommend that you invest steadily for the long term and refuse to be tricked by offers that seem too good to be true.