When 2020 started, number of market participants – by the typical retail investors to institutional capital and bond market fiscal savants – watched interest rates coming to all time lows.RELATED CONTENTNot four weeks after, interest rates were not just reduced, they had been back . In March, the Federal Reserve took dramatic action to fight the pandemic as well as the anticipated economic fallout. Even the Fed went on to state those very low rates of interest would probably hover near rock-bottom amounts for decades, which the fundamental bank would wait for complete employment and purposeful inflation to reunite before increasing them. With the unemployment rate well into double digits, becoming back below 5% or so could take several decades, since it did after the 2008 monetary catastrophe. Given this landscape, what’s an investor to do? How do investors make the most of low rates of interest? As fixed income investors have a harder and harder time finding assets supplying any meaningful return, numerous additional investment opportunities have a tendency to seem more appealing. Listed below are a couple of investment alternatives to research in a very low rate of interest environment: Gold and precious metals.
Large-cap stocks and gains.
High-grade company bonds.
Refinancing may really make a difference.
Gold and Precious MetalsPrecious alloys are arguably some of the most popular investment choices from the investor’s reduced rate of interest playbook. The present blend of easy money policies and an uncertain economic outlook also play gold’s favor. “Gold is perceived by shareholders to become among the greatest investments, recovering fast by economic downturns,” says Spencer Campbell, manager at SE Asia Consulting Pte Ltd. In most cases, the price of gold “also runs counter to stock economic or market changes,” Campbell says. Gold prices have hit fresh all-time highs in 2020, reaching over $1,950 per oz . While it’s a commodity that’s definitely difficult to value, some mainstream ratios used to value the precious metal indicate there could be more room to run, says Charles Self, chief investment officer at iSectors.”The S&P 500 to gold price ratio is slightly above the average over the past 50 years,” Self says. The current economic uncertainty, low interest rates and dramatic increases in the money supply might indicate there’s room for this ratio to fall, making gold outperform equities. Self sees a risk of this ratio returning to the lows seen in 1980 and 2011. “Given that precious metals have no significant correlations to equities or bonds, portfolio managers are just starting to implement allocations to precious metals as another diversifier to stocks, besides bonds,” Self says. And it’s not just gold that stands to benefit, but other metals, too, Self adds. “At iSectors, we believe that the best way to take advantage of this situation is to own a diversified portfolio of precious metals. This portfolio would include gold, silver, platinum and palladium,” Self says)Large-Cap Stocks and DividendsLuis D. Alvarado, investment strategy analyst at Wells Fargo Investment Institute, thinks the current low interest rate environment is similar to the one seen after the financial crisis, providing incentives for investors to “invest in risk-on assets,” and that “equities are definitely at the front and center.””Consider exposure to equity sectors with higher-quality earnings,” Alvarado says. “Within the U.S. asset classes, we prefer large- and mid-cap equities over small-caps – as larger companies generally have higher cash balances, lower leverage and better earnings growth than their smaller counterparts.”Stable large-cap dividend stocks are even more attractive these days, with the 10-year Treasury yield now around 0.6%, plenty of quality dividend stocks with yields between 2% and 5%, and higher in some cases, can be readily found on major U.S. exchanges. High-Grade Corporate Bonds As soon as parts of the investor playbook for a low interest rate environment remain the same in 2020, there’s still an unusual amount of uncertainty in the air. No one knows what the long-term fallout for small- and medium-sized businesses or the labor market will be.Stocks, while generally offering high long-term returns, also come with more risk, and that might not be desirable for a few cautious investors. “Manage volatility with income-generating assets,” Alvarado recommends. “As the recovery continues, yield will be in demand. Investment-grade and high-yield corporate bonds may be poised to perform well” during the post-pandemic recovery, Alvarado says. He adds that this asset class will also benefit from an unprecedented level of direct support from the Federal Reserve in the form of bond buying.Refinancing Can Make SenseAlthough perhaps more a matter of personal finance than investing, it’s worth mentioning that refinancing your mortgage can make sense in a lot of scenarios these days. “One of the best ways you can take advantage of these low interest rates is to refinance your mortgage,” says Craig Kirsner of Stuart Estate Planning Wealth Advisors.With the rate on 30-year mortgages recently hitting all-time lows below 3%, Kirsner notes that the math is firmly in current borrowers’ favor when it comes to refinancing. In some cases, 30-year mortgages might be refinanced into 15-year mortgages and the borrower would still have a lower monthly payment. The long-term savings can be great here, and if savings on monthly payments are invested in low-fee index funds, for instance, the long-term financial benefits would be even greater, Kirsner says. 2020’s Low Interest Rate PlaybookEvery recession has its own texture, but navigating a pandemic-induced global recession in the 21st century is unprecedented in essentially every meaningful way. The Fed’s commitment to propping up the economy by printing trillions of dollars, propping up the bond market and keeping rates at zero seems to have provided a safety net for markets. But at the end of the day, the central bank can’t subsidize everything under the sun. Some investments, like certain real estate investment trusts, known as REITs, are generally notable beneficiaries of low interest rate environments. While it’s possible they will be again, it’s important to maintain some degree of conservatism and flexibility in the particular instance. With inflation still rather low, keeping some cash on the sidelines and maintaining a portfolio of more liquid investments should be one of the underlying principles helping into guide any investor navigating today’s low rate of interest era.