Monday, April 7, 2008

The Fed has thrown Granny under the Bus

The recent series of Fed rate cuts are great for banks, lowering their lending rates to each other and encouraging more liquidity, but this action is also sacrificing the rates of return on fixed income accounts, CD rates, and money market accounts, etc. For example, over the last few months, the interest on my brokerage money market account has dwindled from 5.21% to 2.46%. CD rates are not much better ranging around 3.2% to 3.7%. Given the latest Consumer Price Index, CPI, recently reported at 4%, these fixed income assets are a losing proposition. To make matters worse, I think most consumers would agree that 4% is a low number and that the real rate of inflation is higher.

The impact of this rate decrease to my standard of living is inconsequential. I am still working, still making new money, but this is getting ugly for a lot of retired folks on fixed income with a majority of their nest egg in CDs. A huge portion of their income is derived from interest earned from CDs. The Fed has thrown these people under the bus.

If your grandparents are anything like mine, they do not trust the stock market. Years ago the market was akin to gambling and many still think it is today. Consequently, their investments are much more conservative and are concentrated in low interest earning bank accounts, CDs and bonds. According to a common Bogle formula for stock to bond ratios, that is exactly where they should be invested. If you are 90 years old, you should have 80% or more of your assets in fixed income vehicles.

So, what can one do in this situation? What other options are out there? In the following, I have a listed a couple of ideas, but just remember this information is for educational purposes and is not a recommendation to buy.

1) Municipal Bonds
If you can get granny to open a brokerage account (good luck with that) now is a great time to invest in municipal bonds. Munis are paying decent rates and are very attractive compared to Treasury bonds. They are also free of federal taxes and some are even free of state taxes.

2) Canadian Oil Royalty Trusts
For someone who is willing to take on a little more risk, like myself, I am exploring adding more Canadian Oil Royalty Trusts, or Canroys, to my portfolio. There are several Canroys out there paying dividends of 6% to 15% and a few that trade on the NYSE.

I already have a small position in Harvest Energy Trust (HTE) and am considering adding to that or purchasing another Canroy. However, before I make a much bigger investment, I want to further research the risk versus reward of Canroys and of course write a blog post or two about that.

1 comment:

  1. Sigh.....what a woman! =)

    I'm looking forward to your post on Canroys.