“We’ve pulled the economy back from the abyss” “We’ve pulled the car from the ditch” There is no shortage of platitudes coming from Washington to suggest that the economic crisis is behind us, that financial calamity was averted and that we now seem to be back on a slow but steady path to fiscal health. While the validity of these assertions is clearly debatable, one thing for sure is that the wounds from the recession have not healed and are having a substantial impact on how Americans think about their finances.
Americans’ endurance has been extraordinarily tested and even those that believe the economy is rebounding are showing little appetite for ratcheting up the risk in their portfolios. Polls show that a majority of families are worried about their job, that pension plans may default on obligations and that Social Security may reduce benefits, debasing retirement income to levels insufficient to accommodate their future lifestyle goals. They have responded by saving more of their disposable income which would indicate that their main concern is that of liquidity; the ability to access the cash necessary to meet their expenses. That said, simply saving more, hoarding more cash in portfolios or relying on liquidating assets at sub-market prices is probably not enough.
With money market and other cash-equivalent investments expected to stay at near-zero interest rates for the foreseeable future, a creative liquidity strategy is required to balance the need for cash, security, and growth. Below are a few things to consider as an alternative to a hyper-conservative saving plan:
Staggering CD’s: With yields on cash investments below the rate of inflation, CDs with a range of maturities can let you obtain more competitive returns without tying up huge portions of your money. Converting short-term CD’s to cash is easy to fund an emergency while maintaining a higher yield on longer-term CD’s for anticipated major expense such as college tuition.
Leverage your portfolio and home equity: Most brokerage accounts allow you to borrow against the account assets by pledging the securities as collateral and can be a flexible liquidity tool by allowing your investment strategy stay in place and avoid capital gains tax on selling investments. For those fortunate enough to have equity in their homes, a Home Equity Line of Credit (HELOC) is another flexible liquidity tool. Most HELOC’s are based on the prime rate which is at a 55-year low. Additionally, the interest might very likely be tax-deductible up to $100K.
Dividend protection: For those that are a bit more adventurous, purchasing stocks from high quality, financially solid, dividend-paying companies can offer a consistent income at a rate above that of cash investments with the possibilty of capital appreciation. This is not a strategy for those wary of the market but for those individuals who are a bit less risk-adverse might find this palatable.
Despite the government’s claims, they have failed to restore public faith in the markets. Shell-shocked Americans have big concerns about where to invest to preserve their capital, minimize risk and re-gain their losses. Until they start spending, the recovery will be slow, as will job growth which will continue to fuel their fears. However, currently they are less about spending and more about saving. The above are suggestions to augment savings plans to help meet one’s financial needs whether it be an unplanned emergency or an anticipated long-term goal.
Americans’ endurance has been extraordinarily tested and even those that believe the economy is rebounding are showing little appetite for ratcheting up the risk in their portfolios. Polls show that a majority of families are worried about their job, that pension plans may default on obligations and that Social Security may reduce benefits, debasing retirement income to levels insufficient to accommodate their future lifestyle goals. They have responded by saving more of their disposable income which would indicate that their main concern is that of liquidity; the ability to access the cash necessary to meet their expenses. That said, simply saving more, hoarding more cash in portfolios or relying on liquidating assets at sub-market prices is probably not enough.
With money market and other cash-equivalent investments expected to stay at near-zero interest rates for the foreseeable future, a creative liquidity strategy is required to balance the need for cash, security, and growth. Below are a few things to consider as an alternative to a hyper-conservative saving plan:
Staggering CD’s: With yields on cash investments below the rate of inflation, CDs with a range of maturities can let you obtain more competitive returns without tying up huge portions of your money. Converting short-term CD’s to cash is easy to fund an emergency while maintaining a higher yield on longer-term CD’s for anticipated major expense such as college tuition.
Leverage your portfolio and home equity: Most brokerage accounts allow you to borrow against the account assets by pledging the securities as collateral and can be a flexible liquidity tool by allowing your investment strategy stay in place and avoid capital gains tax on selling investments. For those fortunate enough to have equity in their homes, a Home Equity Line of Credit (HELOC) is another flexible liquidity tool. Most HELOC’s are based on the prime rate which is at a 55-year low. Additionally, the interest might very likely be tax-deductible up to $100K.
Dividend protection: For those that are a bit more adventurous, purchasing stocks from high quality, financially solid, dividend-paying companies can offer a consistent income at a rate above that of cash investments with the possibilty of capital appreciation. This is not a strategy for those wary of the market but for those individuals who are a bit less risk-adverse might find this palatable.
Despite the government’s claims, they have failed to restore public faith in the markets. Shell-shocked Americans have big concerns about where to invest to preserve their capital, minimize risk and re-gain their losses. Until they start spending, the recovery will be slow, as will job growth which will continue to fuel their fears. However, currently they are less about spending and more about saving. The above are suggestions to augment savings plans to help meet one’s financial needs whether it be an unplanned emergency or an anticipated long-term goal.
