Jason Stipp: I'm Jason Stipp for Morningstar. It's very hard to cope with this low-yield environment, but one of the things that investors can do is steer clear of pitfalls and avoid making it worse for themselves. Here with me to offer some tips is Morningstar's Christine Benz. She's Director of Personal Finance for Morningstar.com. Thanks for joining me, Christine.
Christine Benz: Jason, it's great to be here.
Stipp: So, it really hurts, this low-yield environment, we've been hearing from a lot of readers. And there's not a lot of great options, but one thing you can do is avoid making mistakes. So what are some of the major pitfalls that people might fall into as they're trying to deal with this low-yield environment?
Benz: Well, one thing we've been seeing, and thinking a lot about recently, is that we've seen this torrent of assets going into bond funds. And my concern is that what you've got there are some people who are fed up with the low yields they're earning on their cash, so their CDs, and their money market funds, and so forth. So they're thinking, I'll just step out there a little bit on the risk spectrum, look at a short-term bond, ultra-short-term bond, or maybe even an intermediate-term bond, and then I may be able to pick up a couple of percentage points of yield.Read Full Transcript
Stipp: Now, it seems like these sorts of investments aren't really high risk. So is it really a mistake to venture out into some of those funds and try to grab a little bit more yield? Practically speaking, why might that be a bad idea?
Benz: Well, that's good context, Jason, because you're right. If it's a high-quality, short-term bond fund, for example, the level of losses you're apt to see is not going to be great, but it is a loss just the same. Whereas, if you do have assets that you truly can't afford to lose--so maybe you've got next semester's college tuition, or your real estate taxes, or something like that--socked in this investment, it's important to lock it down and not have any losses at all. So I would be wary of tiptoeing too far out on the risk spectrum, if it's money that I couldn't afford to lose.
Stipp: So really, you might not be getting paid in yield for holding that cash in a money market, but you are getting paid in the protection that you have from the loss of value, which is sort of why you're in cash.
Stipp: It's sort of the critical reason you're there.
Stipp: So if you're going to stick with cash then for that reason, do you think we're going to have to wait a long time? Nobody knows, right, but eventually things will get better?
Benz: That's the thing. If you're sticking with cash, and you're in something highly liquid, a money market fund, you will be able to, or your manager will be able to, swap into higher-yield investments when rates trend up. So that's a silver lining.
Stipp: And they pretty much have only one direction to go at this point.
Benz: That's right.
Stipp: So following from that, there's some other, sort of under-the-radar things that the low-yield environment might also be affecting, that could have important implications for the way that you invest. So, you have a couple of those. What's the first one, and why is the low-yield environment making it a difficult decision right now?
Benz: Well, one is the decision to purchase an annuity. And there's a lot of data that show that annuities are a great part of retiree portfolios, retiree toolkits. But the downside of purchasing an annuity right now, is that the payout you receive is keyed, at least in part--arguably in large part--off of the current interest rate environment. So if the insurance company doesn't figure they can earn a lot on your money, your payout will be that much lower. And, unfortunately, that's what you're getting when you lock in an annuity right now.
Stipp: If you did want to get an annuity, is there any strategy that you might undertake at this time to--even though the rates are low--is there anything that you can do to mitigate that?
Benz: Well, one would be, if you didn't want to hold off, but instead wanted to get into this type of product in some fashion, you could decide to stagger your investments into annuities. So maybe put a certain amount into annuities over the next, say, five years.
And that has the side effect, a very positive side effect in my view, of allowing you to diversify your investments across multiple insurance companies. So a lot of investors are rightfully worried about the creditworthiness of their insurers. This is another way to diversify your exposure there.
Stipp: Sure, a second product that you mentioned, that could also have a negative effect because of the low interest rate environment, is long-term care insurance. What's the story there?
Benz: Well, it's a similar story really, Jason. So the premiums that you pay, as the insured party with a long-term care policy, are keyed in part off the current interest rate environment. So if the insurance company doesn't think they'll be able to earn very much on your premiums, your premium payments on a regular basis will have to be much higher. That's why I've been hearing from a lot of retired folks shopping among these products that the prices are exorbitant, even though they're very much sold, and I'm sold, on the concept of long-term care for a lot of different types of retired people.
Stipp: So some very, potentially, great products for investors, but maybe not a potentially great time for them to go full force into them.
Benz: Exactly, so maybe a better idea to investigate them in a few years, maybe even the next few months.
Stipp: Great. Well, Christine, thanks for these coping strategies.
Benz: Thanks, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.