Is This Time Different?

Originally titled, “Practical Suggestions, part 2” this edition of TGIF 2 Minutes covers a topic more related to “Is This Time Different?”

Related to a specific situation or event, most everyone has heard the bold acclamation, “This time is different!” Then, there are those who firmly believe that times are NEVER different… and that time simply repeats itself but with different nuances.

Looking at today, who is correct? The past 12 years are evidence of BOTH.

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In saving for or in retirement, it has never been more important to have a mix of a comfortable amount of safe cash plus a well-designed portfolio.

  • Rates of interest on deposits and CDs have become, in fact, VERY different – as compared to almost every time in investing history. Ask anyone who lived in the 1970’s and 1980’s: interest rates on mortgages were above 15% and short-term rates on deposits were in some cases 15%+!! More recently in 2004 to early 2007 short-term (6 month) CD rates were 4.5% to 5%. Going out a bit further to 12 months or 3 to 5 years, CD rates were easily 6%.
  • By the way, these short-term money rates benefited all kinds of savers: retirees, new young saverspension fundsmunicipalities… heck, even churches.

This state of affairs HAS CHANGED. PERIOD.

  • CDs are still alive but try for the past 12 years to find CD rates at more than 1-2% for 2 years, or rates more than 2% for a 5-year CD! This is for the past 12 years!

What has NOT changed is the need to save. While at the same time what HAS CHANGED is the amount needed to be saved in order to afford retirement.

With interest rates set at zero for the past half a generation (and for the foreseeable future) the return on the “risk-free” or CASH part of investors’ portfolios has gone to NEAR-ZERO. This does not mean that cash is not still king! This tenet of savings has not changed. Cash is still King.

Are you confused yet? Here is the bottom line:

  • Interest rates as set by the US Federal Reserve are NEAR ZERO on short-term cash (1-3 years) for the foreseeable future.
  • Have cash in the bank, and remember –
    • CDs are still alive.
  • Long-term savings – and savings period – need to INCREASE.
  • STOCKS are a risk asset and are still a necessary part of a portfolio.
  • There has never been a bigger need to save and invest. Think –
    • emergency/rainy day fund,
    • short-term or intermediate-term job loss,
    • car and other debt payments that cannot be infinitely extended
    • health insurance premiums (topic for another time)

This message is meant for All. Especially younger people who have the power of compounding interest (as low as it is) and the power of stock market appreciation in their future. And for the “older folk” saving for retirement or in retirement – it has never been more important to have a mix of a comfortable amount of safe cash plus a well-designed portfolio. Ask me about this point.

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