Guaranteed 5% return before Fed cuts interest rates: Investing experts' advice.
It is prudent for long-term investors to disregard market-watchers' short-term predictions. Since your investment horizon is decades, it has little relevance to what stocks will perform over the next six months.
You may have some short-term goals, such as buying a home, car, or going on a fancy vacation in the next three to five years. Inflation and the direction of interest rates can significantly impact the price you pay and the amount you save in the long run.
As inflation decreases, experts predict that the Federal Reserve will reduce its benchmark interest rate, resulting in lower interest rates on debt for consumers, including loans for cars, credit cards, and mortgages.
Currently, earning less on interest-paying vehicles such as bonds, cash accounts, and certificates of deposit is not a concern for savers, as all three vehicles offer guaranteed interest rates above 5%.
It may be prudent for some savers to secure a high interest rate on short- to medium-term investments, advises Amy Arnott, a portfolio strategist at Morningstar Research Services.
""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. Currently, we can still obtain about 5.4% on a three-month Treasury bill, which is quite attractive compared to previous yields. However, he predicts that this will eventually decline."
UBS Wealth Management's senior vice president, Christopher R. Jackson, predicts that the decline may occur sooner than expected.
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"He predicts that the slowing economy and moderating inflation will result in interest rate cuts in the U.S. in the second half of 2024, as seen in cuts overseas."
With that outlook, Jackson believes it's wise to invest in bonds for a guaranteed rate of return.
"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.
"To minimize credit risk, it is recommended for the average individual investor to buy Treasurys instead of corporates, as they require less research. However, having a diversified portfolio of corporate bonds may involve additional 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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