With all the investment stuff on the board, I wondered if there was a point that the interest was so low that it wasn’t worth investing because of the amount of tax you may end up paying on the back end.
When is interest so low, it’s not worth investing?
- Thread starter AlistarWills
- Start date
There are 4 basic ways that investments can make you money 
1) Interest - as in what the bank pays you to use your money. You are correct in that the current environment banks pay close to nothing, but several online banks are paying 1-1.5%. There's even an online checking account at Redneck Bank that pays 1.10% (if you're willing to go through their hoops to do so). Online Bank CDs are paying about 1% right now whether they're 1 year or 10. I don't consider checking or savings accounts to be investments in my own assets. In fact, I exclude them when determining my asset allocations.
2) Dividend - many stocks and all bond funds pay dividends. Dividends are paid quarterly for stocks and more or less frequently for bonds. You can check out what a stock or bond index fund is paying by looking at the SEC Yield for that fund. They're around 2% right now for most total stock and total bond funds. It varies because it's an average over the last 30 days but that's a good measure to give you an idea.
3) Growth - Most tech stocks and tech funds fit this category. Many don't pay a dividend but rely on growth (i.e. expectation that the stock is $100 today and $200 next year) to give investors their return. You're really placing bets on the continuing growth until you sell rather than expecting any periodic return.
4) Other - For example, Real Estate & REIT investments usually are a separate asset category but hope for some growth and some dividend. There are other more complex / risky types as well but we'll leave those alone.
Investopedia has a good page on the differences between these.
As a for instance here are the YTD returns on various asset classes:
novelinvestor.com
High Grade bonds / fixed income funds have returned 6+% through the 1st Half of 2020. If one bought the Vanguard total stock index at the low point in March 2020, you're up 30+% over last 4.5 months. This is why timing the market is futile. Time IN the market is what counts. Invest for the long term. Conditions change and you have no control over them. What was hot last year is usually cold this year.
So, the key is finding a balance of what your risk tolerance is and investing in low cost, risk-appropriate, long term investments. The way I look at is that I would not consider cash accounts (checking / savings / new CDs in current environment) as investments. Park funds you're going to use in next 12 -24 months there but expect little to no return. It's for you to use to pay normal expenses, in emergencies, and through market chaos. Everything else might be in index fund(s) appropriate for ones' risk tolerance.
Others may have differing ideas/opinions.
1) Interest - as in what the bank pays you to use your money. You are correct in that the current environment banks pay close to nothing, but several online banks are paying 1-1.5%. There's even an online checking account at Redneck Bank that pays 1.10% (if you're willing to go through their hoops to do so). Online Bank CDs are paying about 1% right now whether they're 1 year or 10. I don't consider checking or savings accounts to be investments in my own assets. In fact, I exclude them when determining my asset allocations.
2) Dividend - many stocks and all bond funds pay dividends. Dividends are paid quarterly for stocks and more or less frequently for bonds. You can check out what a stock or bond index fund is paying by looking at the SEC Yield for that fund. They're around 2% right now for most total stock and total bond funds. It varies because it's an average over the last 30 days but that's a good measure to give you an idea.
3) Growth - Most tech stocks and tech funds fit this category. Many don't pay a dividend but rely on growth (i.e. expectation that the stock is $100 today and $200 next year) to give investors their return. You're really placing bets on the continuing growth until you sell rather than expecting any periodic return.
4) Other - For example, Real Estate & REIT investments usually are a separate asset category but hope for some growth and some dividend. There are other more complex / risky types as well but we'll leave those alone.
Investopedia has a good page on the differences between these.
As a for instance here are the YTD returns on various asset classes:
Annual Asset Class Returns • Novel Investor
The chart ranks annual asset class returns, from best to worst over the past 15 years, across eight asset classes and a diversified portfolio.
novelinvestor.com
High Grade bonds / fixed income funds have returned 6+% through the 1st Half of 2020. If one bought the Vanguard total stock index at the low point in March 2020, you're up 30+% over last 4.5 months. This is why timing the market is futile. Time IN the market is what counts. Invest for the long term. Conditions change and you have no control over them. What was hot last year is usually cold this year.
So, the key is finding a balance of what your risk tolerance is and investing in low cost, risk-appropriate, long term investments. The way I look at is that I would not consider cash accounts (checking / savings / new CDs in current environment) as investments. Park funds you're going to use in next 12 -24 months there but expect little to no return. It's for you to use to pay normal expenses, in emergencies, and through market chaos. Everything else might be in index fund(s) appropriate for ones' risk tolerance.
Others may have differing ideas/opinions.
Last edited:
Very nicely put together BN...There are 4 basic ways that investments can make you money
1) Interest - as in what the bank pays you to use your money. You are correct in that the current environment banks pay close to nothing, but several online banks are paying 1-1.5%. There's even an online checking account at Redneck Bank that pays 1.10% (if you're willing to go through their hoops to do so). Online Bank CDs are paying about 1% right now whether they're 1 year or 10. I don't consider checking or savings accounts to be investments in my own assets. In fact, I exclude them when determining my asset allocations.
2) Dividend - many stocks and all bond funds pay dividends. Dividends are paid quarterly for stocks and more or less frequently for bonds. You can check out what a stock or bond index fund is paying by looking at the SEC Yield for that fund. They're around 2% right now for most total stock and total bond funds. It varies because it's an average over the last 30 days but that's a good measure to give you an idea.
3) Growth - Most tech stocks and funds fit this category. Many don't pay a dividend but rely on growth (i.e. expectation that the stock is $100 today and $200 next year) to give investors their return.
4) Other - For example, Real Estate & REIT investments usually are a separate asset category but hope for some growth and some dividend. There are other more complex / risky types as well but we'll leave those alone.
Investopedia has a good page on the differences between these.
As a for instance here are the YTD returns on various asset classes:
Annual Asset Class Returns • Novel Investor
The chart ranks annual asset class returns, from best to worst over the past 15 years, across eight asset classes and a diversified portfolio.
High Grade bonds / fixed income funds have returned 6+% through the 1st Half of 2020. If one bought the Vanguard total stock index at the low point in March 2020, you're up 30+% over last 4.5 months. This is why timing the market is futile. Time IN the market is what counts. Invest for the long term. Conditions change and you have no control over them. What was hot last year is usually cold this year.
So, the key is finding a balance of what your risk tolerance is and investing in low cost, risk-appropriate, long term investments. The way I look at is that I would not consider cash accounts (checking / savings / new CDs in current environment) as investments. Park funds you're going to use in next 12 -24 months there but expect little to no return. It's for you to use to pay normal expenses, in emergencies, and through market chaos. Everything else might be in index fund(s) appropriate for ones' risk tolerance.
Others may have differing ideas/opinions.
I’d be careful of bonds right now, most especially long-term ones.
As AW points out, interest rates are historically low. And BN points out gains in bond funds during the last 6 months.
My issue comes from the way those gains came about.
A bond really has three parts — the amount you paid for the bond (principal), the income stream you receive in the form of interest, and the return of the face amount of the bond when it matures.
Note: bonds can have all sorts of whipsy-doodle features. They can be callable, a very few have variable interest rates, and credit considerations (i.e., how confident you are that the entity that issued the bond will be able to pay off its face amount at maturity). Additionally, you don’t necessarily pay the face amount for a bond. Depending on how the bond’s interest rate compares to the prevailing interest rate when you buy it, it’s possible to pay more or less than face. For simplicity’s sake, what follows will ignore those considerations.
For the vast majority of bonds, the stream of interest payments is fixed. It doesn’t change no matter how prevailing market interest rates move.
But the market value of an existing bond — what you could sell the bond for if you need cash — moves inversely from interest rates.
This is important: The value of the bond and the fact that the debtor pays interest on time are two entirely different things, and only very tenuously related.
In other words, suppose you own a bond. If interest rates rise after you purchase it, the value of your bond falls, even though the debtor has paid you interest like the proverbial Roscoe, and even if there is no doubt that he will continue to do so.
If interest rates fall after you purchase the bond, the value of that bond rises.
In the last six months, interest rates have fallen.....meaning the value of previously-issued bonds has risen. That’s the source of most of the gains BamaNation cites.
But in today’s environment, interest rates are already so low that there is very little room for them to fall further. So the potential to gain value from further declines in interest rates is limited.
You can get more interest income from longer-term bonds. But those are risky even if it’s 100% certain that the debtor can and will pay. The problem is rooted in exponential math, and I won’t bore you with the details.
But the bottom line is this: Suppose you own two bonds. One matures in 30 years and the other matures in 5 years. Now suppose there’s a quarter-point (.25%) increase in interest rates. The 30 year bond will take a much bigger value hit than the 5 year one.
Again, the interest rate changes cut both ways — if interest rates fall a quarter-point, the 30 year bond will gain a lot more in value than the 5 year bond. But like I said, there is very little room for interest rates to decline right now.
I have no crystal ball (if I did, Warren Buffett and Bill Gates would have me on speed dial and call me, “Mr. Basket Case, sir.” They don’t do either of those things.), but it strikes me that interest rates have much more room to move up than down. Which puts the value of bonds, separate and apart from their interest payments, at risk. And for reasons cited above, the value of longer term bonds is more at risk than the value of shorter maturities.
All that’s my opinion on bonds. As to your original question about whether low interest rates negate the value of investing.....a big NO.
Especially if you have a long-term investment horizon (i.e., 8-10 years or more to retirement), it’s always a good time to invest. BN offers a number of excellent options, and has posted some outstanding information on investment vehicles.
Read them, keep calm and invest on.
As AW points out, interest rates are historically low. And BN points out gains in bond funds during the last 6 months.
My issue comes from the way those gains came about.
A bond really has three parts — the amount you paid for the bond (principal), the income stream you receive in the form of interest, and the return of the face amount of the bond when it matures.
Note: bonds can have all sorts of whipsy-doodle features. They can be callable, a very few have variable interest rates, and credit considerations (i.e., how confident you are that the entity that issued the bond will be able to pay off its face amount at maturity). Additionally, you don’t necessarily pay the face amount for a bond. Depending on how the bond’s interest rate compares to the prevailing interest rate when you buy it, it’s possible to pay more or less than face. For simplicity’s sake, what follows will ignore those considerations.
For the vast majority of bonds, the stream of interest payments is fixed. It doesn’t change no matter how prevailing market interest rates move.
But the market value of an existing bond — what you could sell the bond for if you need cash — moves inversely from interest rates.
This is important: The value of the bond and the fact that the debtor pays interest on time are two entirely different things, and only very tenuously related.
In other words, suppose you own a bond. If interest rates rise after you purchase it, the value of your bond falls, even though the debtor has paid you interest like the proverbial Roscoe, and even if there is no doubt that he will continue to do so.
If interest rates fall after you purchase the bond, the value of that bond rises.
In the last six months, interest rates have fallen.....meaning the value of previously-issued bonds has risen. That’s the source of most of the gains BamaNation cites.
But in today’s environment, interest rates are already so low that there is very little room for them to fall further. So the potential to gain value from further declines in interest rates is limited.
You can get more interest income from longer-term bonds. But those are risky even if it’s 100% certain that the debtor can and will pay. The problem is rooted in exponential math, and I won’t bore you with the details.
But the bottom line is this: Suppose you own two bonds. One matures in 30 years and the other matures in 5 years. Now suppose there’s a quarter-point (.25%) increase in interest rates. The 30 year bond will take a much bigger value hit than the 5 year one.
Again, the interest rate changes cut both ways — if interest rates fall a quarter-point, the 30 year bond will gain a lot more in value than the 5 year bond. But like I said, there is very little room for interest rates to decline right now.
I have no crystal ball (if I did, Warren Buffett and Bill Gates would have me on speed dial and call me, “Mr. Basket Case, sir.” They don’t do either of those things.), but it strikes me that interest rates have much more room to move up than down. Which puts the value of bonds, separate and apart from their interest payments, at risk. And for reasons cited above, the value of longer term bonds is more at risk than the value of shorter maturities.
All that’s my opinion on bonds. As to your original question about whether low interest rates negate the value of investing.....a big NO.
Especially if you have a long-term investment horizon (i.e., 8-10 years or more to retirement), it’s always a good time to invest. BN offers a number of excellent options, and has posted some outstanding information on investment vehicles.
Read them, keep calm and invest on.
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Related to low borrowing rates, if you have a mortgage and haven't refinanced in the last year or two, I'd recommend giving that a look while rates are still stupidly low.
It would cost me about $300 a month for the next 30 years if I DIDN'T refinance now. Talk about good returns.
It would cost me about $300 a month for the next 30 years if I DIDN'T refinance now. Talk about good returns.
The wife and I checked on refinancing our home last week. The current rate was 2.5% on a 15 year fixed. We are making arrangements to refinance.
(Not necessarily replying to you CT but wanted to include the context)
Also factor in your intention (or not) to move in the next few years. It can take 5+ years to make even a 0.5% reduction pay for itself if you're having to pay a lot of fees etc. for doing so. Also, if you're on a 15 year mortgage and have 10 years left, don't refi into another 15yr if at all possible. Try refinancing into to a 10. You will lower your payments in the 15 but you end up paying more over time.
Here's a decent calculator to determine whether it's worthwhile : https://smartasset.com/refinance/refinance-calculator
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If you can trust yourself to stick with it, you can also refi on a 15 or 20 year note, but pay on a 10 year schedule.
Mrs. Basket Case and I did that. Gives flexibility in case you take a hit to income -- you fall back to the lower, contractually-required, payment. Fortunately, we never had to revert to the contracted payment, and the higher number just got baked into the monthly routine. We actually used some bonuses to pay down principal and paid off the last note ahead of schedule.
Not only do you save interest, but the boost to cash flow is tremendous.
BUT you have to be able to trust that you will do that only in a no-foolin' emergency -- Loss of job, reduced salary, medical expenses, etc. You can't do it because you "need" the down payment on a new car, you "deserve" a trip to DisneyWorld, or you get a "great deal" on a new set of golf clubs.
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