Why Can’t Investing Just Be Easy?

For most of my career in the investment business, investing for many people was a fairly easy set of choices. Those seeking some retirement income and safety of principal ventured to their local bank and put their money in a savings account, a certificate of deposit or perhaps a long term government bond. Essentially, you were all set until the investment of your choice matured or the interest rates changed. So once every few years you readdressed your investments and reset them in the latest CD or government bond and went about the rest of your life. I recently lunched with a former banker and client who yearned for the simpler days when you could earn a respectable rate of return on your money at your local bank or from a high quality bond or treasury offering. Unfortunately, such choices now yield little to no rate of return and when you consider inflation and the decline in the purchasing power of the dollar such investments actually slowly lose purchasing power over time. The inflation rate is actually higher than the rate of interest return on your money.

Monetary policy, set by the Federal Reserve Board and Ben Bernanke, is currently designed to keep interest rates (the money you can easily earn on your money) at painfully low levels. While those who qualify can borrow at very low rates of interest, those who have money to put into savings are essentially offered nothing by their local banks or by the United States Treasury. Interest rates for high quality low-risk debt paper are at nearly all time lows and apparently designed to stay there for at least two more years, if the pronouncements from the Fed are to be believed. Simply put, your bank will not pay you a reasonable rate of interest on your savings because they don’t have to. They can borrow all the money they need from the Federal Reserve at rates from 0 percent to 0.25% per year. They have lots of deposits and no incentive to pay depositors any respectable (historically speaking) rate of return. The banks are taking this opportunity to recapitalize themselves as their cost of capital is near zero. Unfortunately, they are recapitalizing themselves on the backs of those who accept these low rates of return.

At some point this state of affairs will change and interest rates will return to more normal levels, but don’t hold your breath. It could be many years before simple, traditionally conservative investments are the norm again. Until then, investors have the option to use the investment industry to seek higher rates of return by investing in stocks, corporate bonds, municipal bonds, mutual funds, real estate investment trusts and master limited partnerships, etc. in an effort to earn dividend or interest rates of return over 4% per year. These vehicles are far from the simple certificates of deposit that many folks are used to and employing expert assistance to keep your money safe while earning a good rate of return is a must. Even with expert assistance, investors have to take on more risk of fluctuation in the value of their account and indeed some will lose money. Yet, at this time, there are no better alternatives.

So while I, too, yearn for the simpler days of investing for those who are uncomfortable in the markets, I also realize that many folks have been pushed into this position by the doings in Washington. Someday we will return to a more normal investment world. Until then, things won’t be easy or simple for many investors.