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the interest is up and the stock market's down...


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If this was 1985, and your savings was in a 10% CD, you'd be laughing at the stock market nose dive. But the FED, in they infinite wisdom, decided that all capital must be put to work in the stock market. They lowered interest rates to zero, making insured savings pointless. Like it or not, you are shoved into big risk.

 

To play, or not to play?  What is one supposed to do given the risks of "safety" result directly in eroding net worth and ultimately less spending power?  Since that spending power is what will really matter to you and those who depend on you, the greater risk may come from sitting out the game.  And if you have the time and can buy and hold forever, compounding is just a wonderful thing.  

 

Hold forever has no practical application. People hold their savings until they need it. Suppose you need it today? You will have lost money. On any given day, whether the stocks are at highs or lows, someone needs their nest egg. That's how losers and big losses are created with a stock plan, versus savings. 

 

Classically, "savings" is the virtue, not gambling. But today, it's been reversed and everyone is trained that saving is bad and stock risk is good. I would much rather have a 7% CD than a stock portfolio. And so would many prudent people. But that avenue has been cutoff on purpose to flood the stock market with sideline dollars. 

 

Nothing to do with liquidity. Liquidity was accomplished through QEI through QE3. Interest rate is a different issue. 

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Not necessarily. If an insured CD was paying 10%  you would likely have a car loan @ 15%+  and a mortgage rate of 15+ percent as well.

 

The question isn't the spread between saving and borrowing. That spread is always there.  Again, the subject is risk, not just cost. Insured savings at 10% is one set of outcomes and uninsured stock portfolios is something entirely different. During the last meltdown,tons of people had massive shortfalls in their retirement accounts because it was all uninsured risk. That's just the facts. 

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For the CD lovers out there.....yeah....the rates are pretty much in the trash.

 

There are however, alternatives.

 

Market linked CD's.

 

FDIC insured at maturity, rate (per this example) is linked to a basket of stocks WHICH YOU NEVER OWN so you don't have any market risk.  Base interest rate is 1% that you will never get less than, and 6% which you will never exceed.  This interest is paid annually (paid out NOT reinvested into the CD)

 

They log the price of the 10 stocks when the CD closes.  They look at them 12 months later.  If ALL 10 are at or above the reference price, you get the full interest payment.  If enough of them are down, you get the minimum payment.  If some are up and some are down, you'd presumably get somewhere in the middle.

 

 

http://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=c871d689-1267-4dc5-82ab-a3f8445d9c08

 

There are others that might have a higher minimum guarantee but a lower maximum.....or perhaps a lower guarantee and an even higher maximum.

 

There are others that might pay (and I'm making this up to illustrate) "400% of the gain of the market (over 5/7 years)" BUT, to me, the downside in some of them is they are defined as "all up".  Meaning, ALL the reference stocks have to be up for you to get the payout.  If ONE of them is down, you get a nominal interest rate or zero.

 

I don't like the "all up" style CD's, regardless of how sexy they sound.  I prefer the one above where you have a base minimum and a potential maximum depending on the performance of the basket.

 

Not a sales pitch, just showing some things that are out there that a lot of folks don't know exist.

 

That website is public.  You can poke around and look at their UIT's (Unit Investment Trusts) and MLCD's (Market Linked CD's) or anything else.

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.....and you're goin to get mugged if you go down town.......I live back in the woods ya see, my woman and my kids and my dogs and me.....

 

 

The stock market has defied many other economic indicators for the past couple years or more....I'm afraid we are seeing some normalizing take place.

 

Hogfan

......I got a shotgun a rifle and a four wheel drive and a country boy can survive
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.....and you're goin to get mugged if you go down town.......I live back in the woods ya see, my woman and my kids and my dogs and me.....

 

 

The stock market has defied many other economic indicators for the past couple years or more....I'm afraid we are seeing some normalizing take place.

 

Hogfan

......I got a shotgun a rifle and a four wheel drive and a country boy can survive

 

 

I can plow a field all day long.....I can catch catfish from dusk til dawn,,,,,,

Make our own whiskey and our own smokes too....Ain't too many things these ole boys can't do,,,,,

We grow good old tomatoes and homemade wine....................

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  • 2 weeks later...

A market malestrom. That doesn't sound very good.

http://www.telegraph.co.uk/finance/economics/11858952/BIS-fears-emerging-market-maelstrom-as-Fed-tightens.html

Edited by MetropolisLakeOutfitters
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  • 4 weeks later...
I honestly don't have any ideas how our gov is to fix it.
 

The entire global economy is a a debt-based system. So, trying to fix that requires a new global economic system. I would imagine that would only happen if the current system totally collapses. It might. 

 

The reason proto-bankers developed a debt system is that it produces growth, and growth means faster wealth accrual. If there was no debt (no lending), growth might be slower even than population growth. In other words, civilization might go retrograde. Once it was discovered that debt was powerful fuel to growth, there was no turning back. 

 

Everyone in the world is participating in, and locked into, the debt-based economy. 

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Not necessarily. If an insured CD was paying 10%  you would likely have a car loan @ 15%+  and a mortgage rate of 15+ percent as well.

 

The question isn't the spread between saving and borrowing. That spread is always there.  Again, the subject is risk, not just cost. Insured savings at 10% is one set of outcomes and uninsured stock portfolios is something entirely different. During the last meltdown,tons of people had massive shortfalls in their retirement accounts because it was all uninsured risk. That's just the facts. 

 

 

Im struggling to find your point.  There is risk crossing a street. There is risk getting a balloon note on a home and interest rate risk buying any bonds right now.  What gives?

 

 

You start investing when you're young. You contribute to various qualified accounts which defer taxes and in some cases isn't the best move, because many people are in a much higher tax bracket upon or close to retirement. Now, back to the risk. The higher the risk, the better the return. No matter if its fixed income or on the equity side. Yes this involves higher risk and this is where "junk "funds and indexes come to help in some cases.  FYI, the market goes up, the market goes down.  You don't invest your eggs solely in a single company, you diversify.   NOW, pay attention, here is the kicker. Within 5 years or so of retirement you get out of the high growth mode, you are now in the Preservation of wealth mode. You don't have a half a decade or longer for the market to rebound if it does take a dump right before retirement and/or your distributions whether voluntary or mandatory. You tone things back a good bit before you start taking the distributions, you earn a wee bit of interest from high quality bonds, you move money to lower risk equity products and may look at dividend paying stocks and funds and maybe a few quality bond funds. 

 

Insured risk pays very, very little right now and will never outpace a equity filled portfolio over the lifetime of an individual. Fed funds are at .25%, there is no return on any money markets, CD's etc.etc, but loans are CHEAP right now.  There is no better option to build money over time than investing in equities, you just have to start early and understand there are going to be ups and downs.

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