What's New With Investing? (August 2019)
There are largely two story lines driving the news regarding investing in recent months—interest rates, specifically, what central banks are doing about them, and uncertainty over the trade situation and if the economy will turn from growth to recession any time soon. We will address the interest rate issue here.
The Fed cut the Federal Funds rate by 25 basis points at the end of July. This is the rate at which banks and financial institutions borrow money from each other for very short periods. So what does this mean to the average person? The NY Times explains what that means to consumers and investors.
- Savings accounts: most are already paying near zero. Online accounts are still paying over 2%, but a couple of them dropped a bit in anticipation.
- Mortgages: Currently pretty low, but this might be enough to make it worth refinancing if you are paying over 5%.
- Other forms of borrowing: car loans and credit card interest rates are not likely to move.
The biggest positive impact of the rate cut will be if it successfully puts off recession.
Negative interest rates and an inverted yield curve are back in the news, as a couple of central banks around the world have dropped their interest rates into negative territory. In fact, $14.5 trillion of debt around the world yields less than zero percent. This PIMCO blog does a good job of explaining negative interest rates.
What does an inverted yield curve look like? The graph below shows the difference between the 10-year Treasury note and the 3-month bill, so when it goes negative, it means the 3-month rate is HIGHER than the longer, 10-year rate. For an evolution of the yield inversion, check out this WSJ article and the interactive graphs.
Cash has been a hot investment, with money market (and some savings accounts) yielding over 2%, but given the domestic and international interest rate cuts by central banks, the real question is, how long until these returns drop towards zero, and how long will it be until 2% and above for long-term Treasuries will return. Whether you jump into (or remain in) riskier assets will probably depend on your personal views of the short and long-term impacts of trade policy. (MSN)
Stocks and Bonds
We hear and give advice to invest in broad index-based mutual funds or ETFs, yet people still try to outdo the market. This NYT Your Money article by Jeff Sommer discusses how people are mostly wrong, and how avoiding mistakes should be an investment goal. He backs it up with interested stats/data.
Trying to time the market? MarketWatch discusses alternative approaches to surviving a bear market. Bottom line, whatever you did last time (2007-2009) is likely what you will do again. One suggestion is to cut back on your exposure a bit now, while stock prices are high.
Lower interest rates have translated into record high borrowing by corporations. Some of this borrowing is highly concentrated. Nineteen of the Fortune 500 companies hold 1/3 of the total corporate debt outstanding. (Investors Business Daily) What are they spending this money on? Read on.
Many companies are buying back their stock with the cash they have on hand (some argue, from tax cuts) or the cash they are borrowing at low rates. Is this a good or a bad thing? For those invested in the companies doing the buybacks, it is positive to their bottom line. But what the about overall impact?
Other Investment Categories
Are any of you “gold bugs”? GOLD is often mentioned as a component of a diversified portfolio as a counter to stocks and cash holding. Gold passed $1500/ounce last week, and is up 16% so far in 2019. (CNBC)
If you were thinking of turning to Bitcoin as an alternative, only 15% of the total supply remains to be mined, and the rate at which it can be mined is about to drop in half. What will this mean? It is unclear if it will be worth the effort to mine unless the price rises. (Yahoo Finance)
A Bloomberg opinion piece thinks both of these investments may be irrational. Regardless of the economics of investing in either gold or bitcoin (fixed quantity suggests supply and demand might play a role in pricing), “human emotion” tends to drive the demand up or down, not economics.
According to a BankRate survey, people think that real estate is a great investment by a margin of 3/2 compared to stocks. Historically, this has not been the case, but given how overvalued the stock market seems to be at this point, could the general public be on to something? (MarketWatch)
We could devote an entire blog to apps, as many have done. There are the investing apps you most likely have heard of, or possibly use. Acorns, Robinhood, and Stash and are in CBInsights look at the fastest growing financial apps. And there are a bunch of free ones suggested by College Investor in their look at best investing apps. Robinhood makes that list too, but most of the entrants on the College Investor list are the apps offered by the investment/mutual fund companies themselves.
Acorns rounds up your purchases and invests your spare change but costs start at $1/month.
Robinhood is free and easy to use, and coupled with its waitlist strategy, has over 2 million customers and is growing at 140,000 per month! You can trade in stocks, ETFs, options, even cryptocurrency, but you can’t trade fractional shares. This could certainly be an issue for younger, newer investors with less cash to invest at any point in time.
Stash has many investment options, including retirement and custodial accounts but they come at a cost. The stripped down “beginner” version is $1/month, and the top end version is $9 month. (This is likely still cheaper than paying a financial advisor.) Stash stresses education and includes free financial education at all levels.
M1 Finance: College Investor really likes this one. You can set it up to invest any dollar amount across a portfolio of available stocks and ETFs following your portfolio goals or choosing from one of theirs. You can invest fractional shares.
Free apps from the big investing names that College Investor includes in its top ten list are Fidelity, TD Ameritrade, Vanguard, ETrade and Schwabb.
And for those concerned about outliving their money in retirement, Forbes discusses how one fintech firm, Kindur, may have a solution. It can be overwhelming deciding how to best draw down retirement accounts (assuming you have at least one), making decisions about drawing social security, and so on. Kindur aims to guide you through that process. And Kindur is a fiduciary, so they are committed to your financial welfare. The fascinating story in the article is how daunting it was for the founder to convince potential investors that boomers could benefit from and would adopt fintech as much as millennials
Planning your investment unit? Be sure to check out today’s Teacher tip from Amanda Volz
About the Author
Beth Tallman entered the working world armed with an M.B.A. in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducting student workshops, and developing finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.
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