Before the Fed cuts rates, experts advise that now is the final opportunity to secure a guaranteed 5% return on investments.
The economic tides seem to be turning after a period of high interest rates.
It is predicted that the Federal Reserve will decrease interest rates at its meeting on Wednesday, which is the opposite of its previous policy aimed at controlling inflation in the post-pandemic era.
The fall of the Fed's benchmark rate will provide relief for consumers by making loans, including mortgages and credit cards, significantly cheaper.
The upcoming move by the Fed to lower rates is unfavorable for individuals saving for short- or intermediate-term goals, as it means they will earn less on interest-paying vehicles such as bonds, cash accounts, and certificates of deposit.
The three vehicles currently provide guaranteed interest rates above 5%.
According to Amy Arnott, a portfolio strategist with Morningstar Research Services, now may be the final chance for certain savers to secure a relatively high interest rate on short- to medium-term investments.
""Holding a bond with a maturity that matches the timing of your goal makes sense, especially if you're trying to save for a specific goal," she says."
Why it makes sense to lock in higher rates now
It was challenging to earn a significant return on a short-term bond or cash account when interest rates were close to zero for an extended period.
"Arnott states that for the past few years, we have had higher yields on very short-term securities, such as cash. Although it is still possible to obtain yields above 5% on a short-term Treasury bill, she predicts that this will eventually decline."
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According to Christopher R. Jackson, senior vice president of UBS Wealth Management, it is advisable to invest in bonds as there is a strong belief that Fed rate cuts will occur sooner rather than later.
"Getting 5% or 6% in high-quality bonds with a 5- or 10-year maturity is pretty easy, which is a contractual return. This is probably not much less than what we can expect from stocks over the next five to 10 years, but with significantly less risk."
How to invest for short- and medium-term goals
When purchasing a bond, you are essentially lending money to a corporation or government entity. You agree to a specific duration for them to hold your funds and a fixed interest rate, referred to as a bond's coupon. During this time, you receive interest payments at predetermined intervals. Upon the expiration of the bond (maturity), you are returned your principal.
Generally, the greater the risk associated with a bond, the higher the potential return on investment. Bonds issued by less reputable companies frequently offer high interest rates but also come with a higher likelihood of default, which is why they are referred to as "junk bonds."
Arnott believes that while highly rated corporate debt currently yields more than government debt, it may not be a wise investment for retail investors.
"Instead of investing in corporates, it is recommended for the average individual investor to buy Treasurys due to the need for extensive research to assess credit risk. Additionally, having a diversified portfolio of corporate bonds may involve added complexity."
Purchasing treasury bonds, which are backed by the U.S. government, provides a guaranteed return with minimal risk of default. You can buy them directly from the Treasury or through your brokerage account for a fixed rate of return over a specified time frame.
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