Investing in a low-interest rate world can be very challenging and complicated. It can be a time-consuming task, that’s for sure. But with these fourteen tips, you will definitively learn how to manage your finances in a proper way and invest for higher interest rates.
Table of Contents
- Change your bank for higher returns
- Preferred securities offer the best of both stock and bond returns.
- Invest in real estate for higher yields
- CDs increase cash yields
- Avoid extremes of the market
- Invest in Brokerage Firms and Cash-Rich Companies
- Invest in Tech, Healthcare
- Hold on to cash
- Diversify your portfolio
- Take risks to pursue superior returns
- Locate inefficient markets
- No sure-fire way to access high returns
- Consider investing in the personal loan market
- Go for cash and wait for better times
Change your bank for higher returns
So many investors tend to ignore cash returns. The problem appears when their low yielding banks’ savings accounts have interest rates lower than 1%. To avoid this, consider getting an online savings account. This is where yielding accounts can be found in the 2.5% neighbourhood. The online savings account will also provide you with the protection of federal deposit insurance and the possibility of accessing the money whenever you need it. Searching for higher-yielding savings accounts can really make a huge difference. This way, investors can easily increase cash returns. As of right now, online banks offer returns even above 2% which is insurance up to $250,000 per depositor. It is one of the safest ways to get higher cash returns with a guarantee.
Preferred securities offer the best of both stock and bond returns.
Preferred securities are hybrid investments with fixed paired values, or in other words, the face value. They also make scheduled coupon payments and carry credit ratings. In addition to that, preferred securities have long or no maturity dates at all. They may be callable or even eligible for redemption by the issuer on a specific date. This allows preferred stockholders to have a higher claim on dividends than the common stockholders. They are similar to stocks in a way of saying that they are not required to repay the principal. But you do need to keep in mind that preferred securities come with two key risks. The first one is interest rate risk and the second one credit risk. This is why preferred securities often offer higher relative yields.
Invest in real estate for higher yields
Instantly reaching for higher yields might seem tempting, but don’t take on too much risk. It is very common for yield-seeking investors to look to real estate investments. By owning a real estate for lease you will manage to create diversity, long term cash flow, and capital appreciation. This goes for investors with cash for a down payment. On the other hand, for others, there re crowdfunded real estate sites that offer higher returns for smaller investors. For instance, if you’re looking for reliable crowdfunding platforms, websites such as Diversityfund, Fundrise, and Groundfloor are great options.
CDs increase cash yields
One thing you absolutely can’t let yourself forget about is bank CDs. These investments are very important because they are FDIC insured and are regularly issued with terms from six months to five years. There are many options online that you can look up to. Numerous online and brick and mortar banks offer promotions that can secure new customers. They are a safer and more reliable path to higher yields than stock dividends. Another benefit is that withdrawal penalties are minimal. In the worst-case scenario, if a saver redeems the CD before maturity, the sacrifice is no more than six months of interest. Generally speaking, that is a small price to pay for the higher yield.
Avoid extremes of the market
Many experts believe that chasing extremes of the market can actually have many negative results. Therefore, you should probably avoid them. In order to do that, it is essential to have a simple awareness of history and believe in cycles instead of being persistent on unidirectional trends. Paying attention to these things can be a game-changer and can help investors stay in the market for longer. Investors should know when it is the perfect time to be aggressive in the market, but also when to be cautious and careful. It is common for investors to flee from risk when prices are low, but that’s exactly the time to be aggressive. On the other hand, when prices are high and investors are risk-tolerant, you need to be more cautious.
Invest in Brokerage Firms and Cash-Rich Companies
Investing in brokerage firms is a smart move because they earn money from interest gained on cash balances that are held in client accounts. So it is only natural for them to earn more interest when rates are higher. This can immensely improve your overall profit if you pick just the right time to invest. On the other hand, cash-rich companies can also benefit from rising rates. This way, they will earn most of their money on their cash reserves. The best way to go is for investors to search for companies that have low debt-to-equity ratios or companies with a large percentage of book value.
Invest in Tech, Healthcare
What most companies do when it comes to technology and healthcare sectors is hold on to bigger amounts of profit so that they can use these earnings for reinvesting in growth. They rarely ever pay them out in the form of dividends. It has been proven that such a stance often results in increased revenues in a rising rate environment. This is very important because, over the past half-century, the technology and healthcare sectors had average gains of approximately 13% to 20%. And that happened during only the first year following an interest rate increase. In comparison to that, the average gains made for the S&P 500 Index were somewhere between 6% and 7% which is very low.
Hold on to cash
Holding excess cash may seem unprofitable in this low yield environment especially when other assets can provide a greater yield. However, an allocation of money can be very beneficial if you want to have a well-diversified portfolio regardless of rates. In other words, cash is liquid. It gives you a buffer against volatility and most importantly, it allows you to cover unexpected expenses that might come your way. Having excess cash will provide you with the ability to take advantage of any opportunity because you will always be ready to invest no matter what.
All you need to do is shop around for better rates. Even if you have the lowest interest rates on record, it is still possible to make a profit. Nevertheless, it is manageable to find good deals. What you need to be careful about are those financial institutions that offer high-rate introductory offers on savings accounts. This is how they usually lure new customers. Don’t let this fool you. Because once the promotional period is over, your money will just roll over to a much lower rate which is certainly not what you are aiming for.
Diversify your portfolio
One thing you need to remember is that assets can perform differently depending on several different factors. That means that gains can offset the losses of another. Therefore, it is very important to go for investments that have different performance drivers. This way, you will be ensuring that the overall risk level of your portfolio is reduced as much as possible. For instance, investments in fixed income or traditional cash usually provide income that is driven by the level of interest rates. In a portfolio, it would be better if this investment were complemented by other types of investment as well. In this case, you would need those high-quality infrastructure projects in which the income is driven by contracts and lease agreements. This way, your portfolio will be provided with a variety of different income drivers.
On the other hand, it is also crucial to review your allocation to local shares. It has been proven that people are more likely going to invest in companies they are familiar with. They will also more likely to buy from you and read about your company in that case. While reviewing the allocation of domestic shares in your portfolio, pay very close attention to those with high dividend yields. When payout ratios are higher, companies tend to have lower levels of cash reserves. This usually happens during economic downturns. This might even potentially lead to long-term underperformance and you certainly want to avoid that.
Take risks to pursue superior returns
In case an investor considers the market to be efficient, there is only one way you can pursue superior returns. Even though it might sound ridiculous, you need to take on more risks or simply rely on getting lucky. Unfortunately, there is no other way to gain superior returns in the market. That’s just how it works. There is no way you can beat the market, or contribute through active management. Just be careful and take well-calculated risks.
Locate inefficient markets
Not all markets are perfectly efficient. Investors have to try to locate the ones that offer inefficiency. In other words, those are the markets with prices that deviate from fair value. In this case, there will be scope for a superior manager to deliver cash returns that are usually above the manager. The manager mostly does this through the application of alpha or an interior manager. However, this does not mean that inefficient markets just hand out money. And it most certainly does not mean that everybody who goes into that market will make an above-average cash return. After all, some level of risk will always be involved when it comes to this.
No sure-fire way to access high returns
In order for investors to remain active, markets must be inefficient and active investing has to mainly be based on the belief that markets offer the possibility of superior risk returns. There are always people that have the skill not only to identify the bargains but also add value by regularly managing assets. There is no sure-fire way if you want to access high cash returns in a low-interest world. And you can’t always count on the manager’s ability to distinguish expensive stock from the cheap and unreliable one. They can also make a mistake and as a result, go wrong when creating risk for your portfolio.
Consider investing in the personal loan market
Personal loan, or what might be referred to as cash advance in some places, is another way you can invest in a low-rate interest rate world. Popular lenders such as OurMoneyMarket can offer you a great opportunity and a good start, if you are looking for personal loan markets. Getting a personal loan, or cash advance means that the loan amount you ask for is going to be deposited into your bank account as cash. This works on the principle of peer to peer lending, which means that it is easily accessible and that literally, anyone can try it out. Anyone can invest small amounts of money in other people’s loans. This offers endless possibilities and alternatives that you can use for investing in your business.
Go for cash and wait for better times
Lastly, consider going for defensive. Cash and accept returns closer to zero if possible. Then all you have to do is to wait for a better environment to put the cash to work. It is, however, an extremely challenging strategy since going into the cash this way can be an extreme action, especially for an active investor. First of all, you have to be right, and second of all, you have to be really quick. If it takes you three years to be right, then it’s all for nothing. And if the market, by any chance, keeps going up in the meantime and you happen to be wrong into cash, then you really dug yourself a hole. You might even lose your job because of it. So, be careful and if you plan on taking this risk, be prepared for all possible outcomes.
In conclusion, even though investing in a low-interest rate world can seem very challenging and risky, there are many ways you can turn it into your own advantage. There are so many different factors you need to keep in mind, but with these above-discussed tips, it will be a lot easier to get by.