Retirement Planning Advice and Financial Related Education by Barry Unterbrink, Chartered Retirement Planning Counselor

Tuesday, August 30, 2011

Market Update / Safe Money CD Option

More stock market see-saws; A "safe money" option

The stock market last week managed a decent run – up about 4-5%. The prior week it fell 4-5%, and year to date it’s down 5-7% on the popular averages. So what’s up? Certainly not the average investor’s portfolio. Stuff that’s up include consumer prices, rising at a +3.6% annual rate; commodities like food, energy and the market volatility index – not good signs for investors. On the brighter side, if you’ve followed my blog posts this spring and summer, Gold is ahead 6% this month, and silver up 5%; offsetting some of the stock market declines. The metallic duo are up 30% for 2011 so far.

The Federal Reserve’s recent update on its stance on the economy and interest rates was not good news to "Safe Money" savers and investors. Their decision to keep rates stationary until mid-2013 was reassuring to bond investors in that they now could invest without the risk of rising rates, which hurt bond prices. Bond prices shot up sharply, while interest yields fell sharply. Treasury notes and bonds yields are 1/2 to 3/4ths of one percent lower than just 30 days ago. In fact, the 30 year Treasury bond, near 3.6% yield today, just offsets the latest 12 month rise of consumer prices. Seems that the saver is bamboozled again - low rates for savings for two more years and higher prices at the checkout line for goods and services. So how's a saver to get ahead absent a lucky lottery ticket?

CD’s and Fixed Annuity Interest Rates.
CD rates are so low now, that they should be the joke line on the late night comedy shows. I read somewhere that a foreign bank was charging customers to hold their money on deposit. It’s gotten that bad. A friend suggested that I look into the stocks of mattress manufacturer’s; “that’s where people are stashing their money – at least they can sleep well with little worry”.
It’s endemic across multiple areas; CD’s, Savings accounts, annuities, bonds. Three-year CD’s are at 1.70% and 5 year CD’s at 2.4% now. Bond mutual funds and bond ETF’s (exchange-traded funds) offer somewhat higher yields, but as they are securities, they move up and down in price with interest rates and demand. August interest rates have cratered; declining as investors pulled their money from stock-based investments and bought bond-type investments. Short term interest rates are near zero, hence the term “mattress money”. It’s not unusual for 1 percent plus price swings in a single day when money scurries out of bonds and into stocks or gold. So there’s an added level of work owning bond mutual funds or ETF’s - first monitoring them and also paying attention to the dividend dates so you get paid your interest. Plus, remember that bonds' twin nemesis are rising interest rates and inflation. Until you can earn 3.6% on your money, you are losing purchasing power to inflation. Inflation can help you if you are prescient to own "things" that benefit, like gold, silver, and commodities. Annuity guaranteed rates for the terms cited above are low and falling with each rate update. An 8-year fixed annuity now about matches the inflation rate; near 3.5%.

Want Your Cake, and Eat it Too?
An investors balance of risk of loss and earning income is a very tricky widget to get your hands around now.  One idea: Market-Linked CD's, outlined in this space back in late June. This "safe money" alternative offers safety of principal with a stock market 'kicker' - to earn substantially more interest than traditional Certificates of Deposit. I'm revisiting it here since I feel it again deserves some attention for investors of many stripes.  

The Market-Linked CD's are FDIC insured and a CD hybrid – offering safety of principal and perhaps some growth. This Certificate of Deposit tracks a basket of stocks (domestic or global) to determine the interest payments to you. There is no set interest rate – the rate will vary year by year. They are offered in 5,6 and 7 year terms. The price performance of a basket of 10 stocks determines the income you receive. Operationally, you add up the price changes on the stocks, divide by 10 and that’s it. There is a ‘cap’ or maximum that you can earn each year for the CD’s term. That’s because the principal of the CD is insured by the F.D.I.C., so certain parameters must be set to protect principal. Once interest is earned, it cannot be taken away. In years that the stocks perform poorly, you may have 0% interest credited. The CD’s are approved for both taxable and retirement accounts such as IRA’s. Low minimums to invest do apply. Client's will receive the August terms and cap rates in a seperate e-mail in 1-2 days.

Just across my desk, a new CD-linked to a basket of 10 commodities, including copper, corn, silver, sugar and wheat. This could prove to be a great way to combat commodity inflation with no downside risk to your insured deposit. Contact me to determine your specific needs - no obligation to meet with you.

If I can make a forecast. I think that the future holds promise for savers and investors even in this low interest rate era. People have been hammered in their savings and retirement plans twice now in 10 years with serious consequences; falling interest rates and wild swings in the stock markets. The October 2007 high in the stock market is still 2,600 points away on the Dow, or about 20 percentage points lower today. Reminds me of the adage "Fool me once, shame on you; fool me twice, shame on me"; fool me thrice...(add your expletive here!)

Investors (me included) just want a fighting chance to get ahead of taxes, inflation and keep their standard of living static or even growing slightly. My prediciton is that Wall Street, the Banks and Insurance Companies will continue to introduce safer money products that can accomplish that for you and I. It's my job to unearth and analyze these for you; ideas that you may not hear from your stockbroker or financial advisor. I enjoy bringing them to you. Post a reply at the link below or send me an e-mail to if you want to know more, or have topics of interest you desire covered in upcoming posts.

Do have a great Labor Day holiday!
Barry Unterbrink, (954) 719-1151
Chartered Retirement Planning Counselor


Barry Unterbrink said...

Hey, comments are welcome here.

Anonymous said...

Comment at the end of this post, por favor amigo.