Not sure how to invest? Use interest rates as your guide
Ok, so last year your retirement account matched the national average decline of 32 percent as detailed in Stick with the stock market in order to recover from 2008. That’s a big chunk of change to lose and you are agonizing over the best way to make it up.
Like many Americans who lost faith in the stock market last year you might be considering keeping everything in a fixed income account or investment. Good luck.
Interest rates today are pitiful, due to a decision by the world’s central banks to keep short-term rates low in order to help the economy recover. The U.S. Federal Reserve has kept short-term rates at nearly zero for months now, and has said it expects to do so for the foreseeable future. The futures markets expect the influential Federal Funds rate to stay near zero until at least next spring, and at that time expect a paltry increase to 0.25 percent.
Banks are offering an average of 1.2 percent on money market accounts, 1.8 percent on one-year certificates of deposit, and 2.2 percent on five-year CDs. The U.S. Treasury is paying just 2.7 percent on its five-year securities. At a 2 percent interest rate, it will take you almost 20 years to recover to your pre-2008 account balance. However, that number doesn’t take inflation into account: if inflation returns to its long-term average of 3 percent, it will take even longer to recover in real dollars (this assumes interest rates rise with inflation).
There is another option: sticking with the stock market. Over the last 10 years fixed income investments have beaten stocks.
When that has happened in the past, stocks ended up returning 12.6 percent to 13.7 percent over the next 25 years.
At a 13.7 percent rate you would recover your losses of last year in about 3 years, and would then go on to beat inflation in subsequent years.