In risky financial times people often choose deposit accounts such as savings accounts, certificates of deposits, and money market accounts in an effort to avoid risk. What they fail to take into consideration however, is the inherent risk associated with the interest rate volatility of these accounts.
With FDIC insurance protecting the principle investment of things like 1-month CDs – one of many excellent examples of these types of investments – investors are lulled into a false sense of security. What they may not realize is that while they will lose their principle the expected return on that money can fluctuate wildly.
For instance, at a given time, 1-month CD rates peaked at 19.24%. This means that if you had a $100,000 CD, you would earn a hefty $19,240 in just one year. That is if the rate held. Of course it didn’t and since short-term CDs continually roll over, each turn runs the risk of reinvesting at a lower rate. In just two years the rate dropped to less than half of where it had been, settling temporarily at 8.64%. This translated to an annual return of just $8,640 on that same $100,000 investment.
While a more than $8,000 yearly return may still not sound like a terrible deal if you flash forward, rates had fallen to a mere 0.4% — representing just $400 a year on the same $100,000. While the principal was safe, the expected return had fallen sharply. What was once a safe, high-earning investment was now essentially idle money.
Unfortunately, interest rate volatility isn’t a thing of the past, recent action in the Treasury bond market suggests it’s stirring up again. The good news is that bond yields have been moving higher and with CD rates so close to zero it certainly seems they are more likely to rise than fall. Still, the past can act as food for thought in choosing future investments.
Investing in a Great Lakes Secured Fixed Income can provide a 50% ROI. In fact, a fixed secured note of $32,000 at 10% APR (interest only) for a 5 year term pays the note holder $267 per month. Over the course of the investment the returns total $16,000 in 60 monthly payments. That’s 50% of the original principle — which is also returned at the end of term.
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