As interest rates are predicted to dip, savvy investors are seeking proactive solutions to safeguard their hard-earned income.
While some money market accounts and high-yield savings accounts currently boast enticing 5% yields, complacency could prove costly. The Federal Reserve is likely to initiate interest rate cuts later this year, despite recent inflationary spikes. This imminent shift translates to a significant decline in these high yields.
To stay ahead of these potential cuts, financial experts recommend locking in yields anywhere from one to five years. This proactive approach preserves your current, higher income.
Understanding your risk tolerance, investment horizon, and financial goals is crucial when navigating the investment landscape. Here are four relatively low-risk strategies to capitalize on these attractive yields:
1. Multiyear
Guaranteed Annuities (MYGAs):
For individuals seeking returns comparable to certificates of deposit (CDs) but with a longer lock-in period, MYGAs offer a compelling solution. These fixed-rate annuities come with the added benefit of tax-deferred earnings until withdrawal.
MYGA terms typically range from two to ten years, and the minimum investment can be as low as $2,500. For instance, ImmediateAnnuities.com currently offers a five-year MYGA from A-minus rated Liberty Bankers Life for 5.4%. This surpasses the top five-year bank CD rate of 4.6% listed on Bankrate.com.
James Sahagian, a certified financial planner, highlights the appeal of MYGAs, prompting him to increase his fixed-rate annuity investments in the past year. However, potential downsides exist, and careful consideration is necessary before taking the plunge.
Firstly, MYGAs are insurance products, not FDIC-insured investments. Investors should thoroughly research the insurer's ratings before committing. Experts recommend sticking with insurers rated A-minus or above. Resources like A.M. Best or your state's insurance regulators can provide these ratings.
Secondly, MYGAs, like most annuities, are illiquid. This means they are not readily accessible, and early withdrawal penalties can be substantial, ranging from 5% to 8% of the invested amount. Therefore, allocate funds you don't require immediate access to.
2. Defined-Maturity
ETFs:
These innovative instruments combine the predictability of holding individual bonds until maturity with the advantages of exchange-traded funds (ETFs). This translates to transparency, liquidity, and low costs. Defined-maturity ETFs typically distribute monthly income, and upon maturity, the ETF liquidates, returning the net asset value per share owned by the investor.
Christine Benz, a personal finance and retirement planning director at Morningstar, strongly advocates for these products, particularly for individual investors. She emphasizes their ability to provide diversification, which is challenging for small bondholders purchasing individual corporate bonds.
Invesco and BlackRock are the leading players in this space, offering BulletShares and iBond ETFs, respectively. Both issuers provide ETFs for investment-grade corporate, high-yield, and municipal bonds. BlackRock even offers options for U.S. Treasuries and Treasury inflation-protected securities. These ETFs hold a diverse range of bonds, meticulously selected based on their effective maturity date. This diversification mitigates the impact of default risk.
The specifics of how matured-bond proceeds are reinvested within these ETFs differ slightly between providers and individual fund types. Generally, the proceeds are invested in Treasury bills or cash until the predetermined maturity date of the fund, such as 2024.
Currently, the Invesco BulletShares 2024 Corporate Bond ETF (BSCO) boasts a yield to maturity of 5.5%, while the iShares iBonds Dec 2024 Term Corporate ETF (IBDP) yields 5.6%. Investors can choose a single fund or build a bond ladder by purchasing several. The fees associated with these funds range from 0.07% to 0.43% annually.
Ronnie Thompson, owner of True North Advisors, appreciates the liquidity offered by defined-maturity ETFs compared to individual bonds. He explains that selling these ETFs before maturity incurs no penalty, although you might miss out on some accrued interest.
3. Preferred Stocks:
Bridging the gap between common stock and bonds, preferred stocks present another attractive option, as highlighted by Steven Conners, founder of Conners Wealth Management. He emphasizes their increased appeal when inflation is on a downward trajectory and the Fed maintains a neutral monetary stance. He explains, "The interest-rate risk diminishes over time, making preferred stock more attractive for income-oriented investors."
Preferred stocks share similarities with long-term bonds, both having a par value (typically $25 for preferred stock) and offering regular income payments. They also take precedence over common stock in the event of company liquidation, ranking behind bonds
