Where can I invest my safe money and get a good return?
Welcome back to Telos Financial’s blog. The purpose of the blog is to discuss financial concepts that I believe are important. I want to start discussions about that will educate, benefit, and improve your financial life. Ultimately, to help you focus on your telos!
2022 was a crazy market year; crazy bad that is. You probably remember that though. One of the questions I got a lot back then was, ‘where can I put my money so it will be safe and also get some growth?’ It’s not a new question, everyone wants at least some very low risk growth, it’s just something that’s been tricky to find the prior decade and a half, however, there are quite a few alternatives now.
I think there are several reasons for the question.
When markets are done, investors get tired really quick of the bad news and bad feelings associated with down markets. Additionally, in years like 2022, when equity markets are down to correction type levels, fixed income markets tend to correlate. That is to say, equity markets are down and so are bond markets, so it can be tough to find protected places.
I think it’s further exacerbated by traditional investing wisdom which says that fixed income investments should be more stable and have less volatility than equity investments. Fixed income for many was thought of as “safe” money. I believe there’s a lot of truth to that over long periods and I think it’s been true over most history. HOWEVER, there have been periods where it’s not. From about 2008-2022, we saw it being untrue through a lot of periods.
A more technical way to phrase this is to say there is a positive correlation between fixed and equity markets.
2022 was a great example of this correlation. There were numerous times in 2022 when bond market indices were down further than stock market indices, but generally, fixed markets and equity markets have moved in line with each other.
But WHY?!
The primary driver behind this was an environment of rapidly rising interest rates. The Federal Reserve (The Fed for short) was raising rates in order to stop the incredibly high inflation we experienced. There are a lot of reasons why they are doing this, but I’ll leave that for another blog.
As The Fed raises rates, it either directly or indirectly increases other interest rates; including mortgages, corporate bonds, auto loans, municipal bonds, on and on and on. Bond Math 101 says as interest rates go up, bond prices go down. There’s a very logical explanation why, again however, that’s a story for another blog.
Suffice to say, 2022 had rapidly rising rates (several at 0.50%, 0.75%, and most recently at 1.00%) at levels we have haven’t seen in years. Logically, that will cause bond prices to go down rapidly.
It all makes perfect sense, but it’s unfortunate that it’s happening at the same time the stock markets are falling.
That’s great, but where do we go from here?
All of that said, you’re probably wondering where to invest now.
The wonderful thing about rates having gone up as much as they have so far is many short term & more secure investment options have become more attractive relative to the last few years.
I’ll go through a few of my favorites here. As always when making investment decisions, make sure to consult your favorite financial planning professional (or you can always hire me :D) before making any financial decisions.
High Yield Savings Accounts
I’m a big fan of High Yield Savings Accounts. Lots of reasons for this, but here are a few.
- They are highly liquid (that is to say you can add or take money as you please with very little restrictions).
- Another is they pay a higher interest rate than a normal savings.
- Another reason is they have variable interest rates (so, in a rising rate environment, you can expect the yield they pay to increase with rate increases).
- Another reason is low fees. There generally aren’t fees associated with these.
What’s the drawback? A couple main drawbacks I normally associate with these types of accounts.
- They aren’t the best possible yield you can get.
- Not all financial institutions offer these accounts, so you may need to use another financial institution for this account. Which means not only another password and user id, but you have to move the money there which causes some lag.
Certificates of Deposit (aka CDs)
CDs are a great option as well. As rates rise, the payout on CDs rises. Today, rates on CDs are right around what High Yield Savings Accounts are paying, which makes them less attractive than the High Yield Savings. The reason is with a CD, your funds must be tied up for some period of time in order to get the full return, so you are giving up some liquidity. Generally, a lack of liquidity would be rewarded with a higher yield, but with rates rising so fast, we’re seeing some anomalies in rates that I expect to reconcile over time, just not today.
All of that said, it’s worth looking at these because your financial institution may be running a higher promotional rate. Or, as I mentioned, this is all likely to change by the time I post this blog.
It’s not all rainbows & unicorns, as I mentioned, the increased interest rates have increased borrowing costs. So, while you can get better returns on your fixed income, you also have to pay more when you borrow.
Series I Bonds
Series I Bonds are government issued bonds that are indexed to inflation. Because we’re in a crazy high inflation environment, returns on these bonds are also crazy high. I don’t think that will last forever, but it’s here for now and at least for the short term. Yields on these were 9.62% per year in 2022 and are at 4.28% as of October 2024.
A few things to keep in mind. These rates reset every 6 months, so this is the rate from May of 2022 to October of 2022 and they’ll reset then based on inflation (which remains high). So, the rate is not guaranteed and will go down at some point.
The main benefit to these is in the rate. You get a very competitive interest rate and it’s paid by the US government (so is widely considered to be highly secure and a safe investment).
The biggest problem with these bonds for investors is the maximum you can add is $10,000 per person. While that will be plenty for some investors, it will be not nearly enough for others who have much larger fixed income needs.
Another problem with these bonds is you have to set up an investment account with the government. If you like things easy to use and streamlined, it is one more login you have to monitor.
Bonds
A riskier option right now is bonds. Corporates, municipals, High Yield, short term all of these bonds have been pummeled this year by the rising interest rates. Depending on your risk tolerance, time horizon, and goals, it could be a great opportunity for you to buy into some bonds that have depressed pricing with the outlook that prices will come back as bonds mature.
You’ll definitely want to review this decision with your financial professional before jumping into anything, since there is significantly more risk involved than the other investment vehicles I mentioned.
Wrap Up
To sum up, there are many great options to earn decent returns in fairly stable investment vehicles than were available from 2008-2021. That allows investors access to lower risk and higher return.
If you’re worried about short term market declines, have short term expenses and need a holding place for some funds, planning for portfolio income needs, or just want some return on your emergency fund, these investment options provide some good options. Make sure you consider your liquidity needs when making these decisions as well as convenience and risk tolerance.
As always, I would strongly encourage you to consider how this type of investment fits into your long term financial plan and goals.
What’s a financial plan?
A financial plan is a long term projection of expenses, savings, and growth to guide your financial life. It takes into account your goals, savings, market growth and volatility, different possible outcomes, risks, and inflation (among many other factors) to help make sure you have a successful financial future. These can be incredibly complicated, but they can also be very simple. Each financial plan is unique, so only you (and your trusted financial partner) can make that decision for yourself.
If you are looking for help with financial planning, I believe in most cases, a CERTIFIED FINANCIAL PLANNER™ professional will be best suited to help you. I can’t speak for every financial planner, but what I would say is you need to do your due diligence when looking for a planner, make sure the services they provide are what you are looking for, the costs are what you are willing to pay, the relationship and service level are what you are looking for, and that you get along well.
If you do want to create a financial plan, you should expect to talk in depth about your current financial situation and goals. You will have to provide documents like financial statements, tax returns, pay stubs, estate planning documents, loan statements, and anything related to your financial life that you want help with.
There are the guidelines that the CFP® Board lays out that all professionals with the designation must follow, there are practice guides
Telos Financial is a Michigan’s financial advisor for millennials, gen xers, & young professionals. It is a fee based, holistic financial planning firm located in Plymouth, Michigan serving young professionals and families. Dennis LaVoy, CFP®, CLU® founded Telos Financial and uses his experience, knowledge, and expertise to help families and individuals around Metro Detroit, Ann Arbor, and across the great United States of America achieve their financial objectives.