I’ve said it before, but we are spoiled when it comes to recent stock market returns. Until recently, we saw one of the best market environments in history. Investment portfolios swelled, interest rates plummeted and even people who knew nothing about investing made questionable decisions and often made money. It was, as they say, a heckuva of a ride.
But that came to a screeching halt a little over a year ago. Markets dropped sharply upon entering an extended period of high volatility. Global inflation struck, resulting in the Federal Reserve raising interest rates throughout much of 2022 and into 2023, with no end yet in sight.
Amidst all the noise, we keep seeing troubling economic news such as tens of thousands of tech industry workers being laid off, along with increasing numbers of employees in other industries. Even McDonalds, which by its own admission is “in the strongest position it has been in years,” with nearly $2 billion of net income in the fourth quarter of last year, laid off hundreds of corporate workers and slashed pay for many more.
When people get nervous about their investments, one of two things often happens: Either they pull all their positions out of risky investments preemptively, or they wait until the market drops and then sell out of panic just when prices are at or near the bottom. Of those two options, the former is by far the better choice, but that doesn’t mean it’s the best one.
That isn’t to say investing in “safe” vehicles such as CDs, bonds and annuities is a bad idea as an alternative to a saving account. Rates of return on many of those products are the best I’ve seen in my entire career. We’re in the middle of a short-term interest rate spike, which is unfortunate if you’re planning to finance a car or a home. But it’s great news if you’re planning to invest in interest rate-linked assets.
It’s possible today to get an annuity or a CD that pays more than 5% interest. I bonds are sitting at 6.89% through the end of April 2023. Such rates were unheard of even one short year ago, which makes these products much more attractive than they’ve been in a very long time. However, as with any investment, it’s important to do your homework on where to put your money to grow.
I frequently encounter clients who have purchased annuities that don’t perform as well as expected, because they didn’t consider the particulars of the annuity. Often, the gains from the annuity are at least partially offset by unnecessary riders.
For instance, if you don’t need income from your annuity, it doesn’t make sense to have an annuity with an income rider, yet many do. It’s common to see an extra 1.5–2% built into the product with riders, and that’s money that could have gone to you instead.
The good news is that there are many more alternatives to saving accounts now than ever before. A recent influx of accumulation products that don’t rely on riders at all means you can easily find a product with an overall yield that is much more favorable than those with riders. To do so, it’s important to carefully consider who is telling you to buy a product.
As I’ve said before, if your broker is making money based on selling you specific products, they may not be putting the best results for you at the top of their priority list. Asset Preservation Wealth & Tax is what’s known as a fiduciary. This means we are obligated to consider the best outcome for our clients as our highest priority.
By working with a fiduciary advisor, you can at minimum be assured they won’t be trying to sell you a product just because they’ll earn a commission.
Diversification is Still Important
As with most things in life, even “safe” investments like annuities or treasury bonds carry risk if you focus on investing exclusively in them rather than diversifying your portfolio. After all, a safe investment with a maturity date is only safe if you don’t need to access the money before it matures.
If you’re exclusively invested in long-duration products when an emergency requires you to access a large amount of cash quickly, you risk having to pay taxes and penalties for early redemption of those investments. This is a major area of concern when considering what to do with money other than a saving account.
This risk can be reduced if you balance your safe investments through varying duration products. Shorter-term CDs, bonds and other low or no-risk investments can provide you with access to cash if you need it while still growing your money at higher rates than savings accounts.
While short-duration low-risk investments have, compared to historical products, stellar rates of return now, these returns won’t continue forever. When interest rates go down, rates on these products also drop, often rapidly. Viewing short-term investments as though they are long-term holds is an almost surefire way to be disappointed eventually.
When that happens, frequently markets move in the opposite direction; as interest rates drop, the market rises. This leads to another common mistake, the “Buy Low, Sell High Inversion.” From an early age, most people learn the way to make a profit is to buy something at a low price and sell it at a higher price. All too frequently, however, the opposite happens with investors in the market.
People see the market rising rapidly, and want to get in on the gains. Similarly, when they see the market falling, they want to divest because they fear further losses if they stay in. The problem is that once you’ve observed the market rising, you’ve already missed out on gains.
Once you observe the market falling, you’ve already experienced losses. In short, you risk buying high and selling low!
This is why I frequently remind clients that investing should not be about timing the market, but about time in the market. Historically over time, the market has always gone up. By staying invested for the duration, you increase your likelihood of coming out ahead versus trying to buy and sell when you think — hope — conditions are most favorable.
The same concept holds true when seeking safe harbor in cash-forward investments like CDs and bonds as an alternative to a bank. If you’re trying to shelter in cash while the market is down or volatile and planning to reenter the market when conditions become more favorable, the problem becomes, when do you reenter? If you guess wrong, you stand to lose a lot of money.
Is There Something Better Than a Savings Account?
Yes, there are several alternatives to a savings account that can potentially offer higher returns. You should carefully conder your goals before you choose one of these options. Do you want a safe place to access your money easily? Or do you want a place to put your money to grow?
Alternatives to a bank account often comes with different levels of risk and other considerations:
- Certificates of Deposit (CDs): These offer higher interest rates than regular savings accounts but require a fixed deposit period. These are short-term alternatives to a savings accounts.
- Annuities: These insurance products require an initial investment and can pay out income either immediately or in the future. They have options for fixed, variable, or indexed returns.
- High-Yield Savings Accounts: Online banks often offer savings accounts with better interest rates than standard savings accounts.
- Money Market Accounts: These accounts typically offer higher interest rates and come with check-writing privileges.
- Bonds and Bond Funds: Investing in government or corporate bonds can provide higher returns, but with some risk.
- Stock Market: Investing in stocks can offer higher returns, but also higher risk.
Which Savings Account Will Earn You the Least Money?
Savings accounts that earn the least money are traditional savings accounts from brick-and-mortar banks. These low-interest savings accounts severely limit your savings growth potential. It can lead to financial instability and difficulty achieving goals. However, traditional savings accounts are still used because people may need quick access to fund in emergencies.
If you’re wondering where to put your money to grow, consider an alternative to a savings account. Ensure you consult with a fiduciary, so you have professional guidance based on your needs.
Is Your Money Stuck in a Traditional Savings Account?
There are two main reasons why people have saving accounts: it’s a stable place to keep their money and they have easy access to their funds. Your money won’t be stuck in traditional savings account like it would be in a long-term investment. However, the purpose of a traditional savings account is that it’s a place to put your money to grow. Withdrawals are typically discouraged.
In fact, under Regulation D, financial institutions used to have withdrawal limits or place restrictions on the type of withdrawals you make such as automatic bill payments or overdraft fee coverage. However, during the COVID-19 pandemic, the Federal Reserve Board put an interim final rule to modify Regulation D.
Keep in mind that banks and credit unions can still set withdrawal limits or charge fees for excessive withdrawals from savings accounts, even though there is no federal mandate for these restrictions. While your money isn’t stuck in a traditional saving account, you may be subjected to some limits.
Is 7 percent interest high?
Yes, a 7% interest rate is considered high compared to traditional savings accounts and other low-risk investments. Getting a 7% return usually comes from making higher-risk investments in assets like stocks, real estate, or certain bonds.
Balance in All Things
The central conclusion to the question of where to put money to grow when you’re concerned about the market is to maintain a balanced portfolio. You’ll probably note that this is the same advice you should follow when you aren’t worried about the market! A properly-balanced portfolio will help you ride out the bad times while enjoying gains from the good times.
Chasing “hot” investments when times are good might make you more money in the short term. As many learned when the markets became volatile after the pandemic struck, remaining profitable with an imbalanced portfolio becomes much less likely when those good times end.
Similarly, structuring your portfolio in favor of extreme safety may keep you from losing when times are volatile, but at the expense of being able to take advantage of gains when the market swings upward.
This is why, at Asset Preservation Wealth & Tax, we advise our clients to maintain balanced portfolios to protect them both from suffering more than necessary in downturns, and from sitting on the sidelines while others reap profitable rewards during upswings. We can help you determine what you can do with money other than a saving account.
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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
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