Overlooked in the media's hyper-coverage of "QE3" is the other
part of the Federal Reserve's big plans; the extension of
zero-interest rate policy (ZIRP). Let's look at how this is
damaging income investors everywhere.
Today's 7 Years of Famine
What's happening to today's income investor reminds me about the
seven years of famine explained in the Bible book of Genesis. Back
then, seven years of feasting were followed by seven years of
famine, which extended through the ancient Middle East. What about
today's famine?
The Fed manipulated interest rates down to zero percent in 2008
and has kept them there ever since. And as Bernanke & Co. has
reiterated, the Fed wants rates at zero until at least 2015. Put
another way, 2008 to 2015 is the seven year period that equates to
the Biblical seven years of famine for income investors.
Damage Assessment
How bad has it gotten? Let's analyze the Fed's damaging policies on
income investors.
Investors with money parked in 10-year U.S. Treasuries
(NYSEARCA:IEF) can double their money at today's rate of 1.62% in
approximately 44 years. Here's some perspective: For 70-year olds
reading this, that means you'll need to extend your investment time
horizon to age 114. You better eat your Wheaties!
The numbers are far more severe for investors with cash in money
market funds (Nasdaq:FRTXX). For today's highest yielding 7-day
money funds, you'll need 720 years to double your money. (See table
below) Annual yields at today's money market rates of 0.51% will
give you a double in 141 years. Even if you're Methuselah, or
someone in his likeness, it's doubtful you have that sort of time
or patience.
Inflation - the Sleeping Giant
"Over the past four years, the inflation rate has averaged a mere
1.2%," argues John C. Williams, president and chief executive
officer of the
Federal Reserve Bank of San Francisco
in his just published Economic Outlook. "That's the lowest rate
recorded over a four-year period since the early 1960s."
Unfortunately, Mr. Williams' exuberant tone doesn't tell the whole
story.
Although interest rates rise and fall throughout the decades,
the erosion of the dollar's (NYSEARCA:UUP) purchasing power has
been nearly constant. And the Fed has accelerated this
phenomenon over the past five years with its multi-trillion dollar
stimulus programs. (This October 2012 ETF Profit Strategy
Newsletter identified this in its Mega Investment Theme Report.) By
some estimates, the dollar's buying power has declined more than
95% since 1913 - the year the Federal Reserve was born.
One solution for incomeinvestors is to choose higher yielding
investments. The obvious problem is that many of these areas are
jam packed with higher risks. So far this year, our
Income Mix ETF Portfolio
, has generated over $8,500 or 8.5% in annual income. There's no
magic formula, just a common sense approach of using low cost
ETFs
and not using leverage or chasing yield.
If income investors want to avoid another seven years of famine,
balancing the need for yield with principal protection is an
absolute must.
How Long Does it Take to Double Your Money?
|
Investment
|
Current Yield
|
Years to Double Investment
|
|
Money Market (7-day)
|
0.10%
|
720
|
|
Money Market (annual)
|
0.51%
|
141
|
|
CD (5-yr)
|
1.38%
|
52
|
|
10-Yr Treasury
|
1.62%
|
44
|
|
Total US Bond Mkt Index
|
1.61%
|
44
|
Source: ETFguide.com
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