It’s Your Money: Getting return on investment in a time of low interest rates

If you deposit $10,000 into a savings account at one of Scotts Valley’s major banks, you’ll earn an interest rate of about 0.03 percent. In one year, your account would be worth $10,003. With that $3 of interest, you could go to Los Gallos and treat yourself to a taco, as long as you don’t order a drink.
Savers who live off their interest are starving for yield these days. They’ve watched interest rates drop for decades to near zero. They hope interest rates will eventually go higher, and they take comfort in the belief that they can’t go much lower. Interest rates can’t go below zero, can they?
Yes, Gustaf, indeed they can. Sweden, Finland, Austria, Germany, and Switzerland all are selling government bonds that pay negative interest rates. The Swiss one-year bond, for example, pays minus-1.38 percent. A Swiss saver buys a bond for 10,000 francs. At the end of one year it is guaranteed to be worth 9,862 francs.
Why would anyone put their money into an investment that is guaranteed to lose? Why not just stuff your cash in a mattress?
Many reasons. It is safer to keep your money in a bank than keep piles of cash at home. There’s also the convenience of check-writing. And many large investors, like insurance companies and pension funds, are required to hold government bonds.
I don’t think we will see negative interest rates here in the U.S., but who knows? A precedent has been set. What happens in Europe doesn’t necessarily stay in Europe.
Which brings us back to U.S. savers starving for yield. They are tempted take higher risks to get higher returns.
The misguided government policies here and abroad that have led to ultra-low and even negative interest rates are forcing savers to become gamblers — the risk-averse to become risk-takers. It’s either that, or get no return on your money.
Venture out on the risk-reward spectrum with great care. Diversification is key. If something goes wrong with an investment, you don’t want too many eggs in that basket. Here are two income-producing areas that are worth a look:
– Preferred stocks: They trade on major stock exchanges, and are a cross between a bond and a common stock. Some experts see them as an overlooked asset class because the numbers of shares outstanding are often too small for institutional investors who deal in million-dollar positions. Small investors actually have an advantage here.
Yields of 5.5 percent to 7 percent are available with varying levels of safety. Read the fine print on preferreds selling above $26 per share that can be redeemed at $25. Understand that, if interest rates spike higher and you’ve locked in 6 percent on a preferred, you may be stuck with that 6 percent for years.
– Closed-end funds: These are like mutual funds. You buy a piece of a large portfolio of preferred stocks or bonds. But the shares trade on stock exchanges and their share prices sometimes fall below their net asset value. When I can buy a dollar’s worth of an income portfolio for less than 90 cents, my ears perk up.
– Mark Rosenberg is a financial adviser with Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 831-439-9910 or mr********@fw*.com.