Many readers have indicated they are concerned about future returns on both stock and bond investments. Returns for both markets overall were poor in 2022, and many analysts are not enthusiastic about returns in 2023.
What are the alternatives for conservative investments in 2023?
Because the Federal Reserve is likely to continue raising interest rates in 2023, albeit at a more moderate pace than it did in 2022, several options look more attractive. Here are a few:
—Money-market investments: Not long ago, returns on these instruments were well below 1%. That situation has changed significantly, and brokerage firms and mutual funds are now offering money market investments at much higher rates. For example, I recently invested in federal money market funds at Vanguard that are returning over 4% on a 30-day basis. Other financial organizations are offering similar rates.
There is no guarantee that the returns will stay at the current level, but as long as inflation persists, and the Fed continues to increase interest rates, it is likely that returns will stay at current levels. When you buy market funds, you have the flexibility to withdraw funds whenever you wish. And if you invest with a major financial institution, there is minimal risk to your principal. There is no such guarantee with investment in bond funds, even those with short maturities. Most of these funds showed losses to capital in 2022.
—Treasury bills/notes: T-bill returns have also increased significantly in 2022. As of January 2023, you can obtain a coupon equivalent return of 4.88% for 6-month bills and 4.75% for one-year bills. Return for two year treasury notes is 4.34%. The interest is not taxable at state and local levels. Return of your principal is guaranteed.
—Certificates of deposit: Just as rates have increased for money-market instruments and T-bills, returns on CDs have also increased significantly. In January 2023, for example, one-year CDs had returns as high as 4.5%; for two years, rates are as high as 4.8%.
—Multi-year guaranteed annuities (MYGAs): If you are willing to invest for more than three years, you can obtain higher returns from MYGAs than from CDs, with the same maturities. For example, currently, for five-year maturities, you can receive a return that exceeds 5%. Although you can purchase MYGAs for longer periods, in a rising interest rate environment, you may want to restrict your time frame to no longer than five years, even though you can obtain a slightly higher interest rate for longer maturities.
You can invest in MYGAs in individual retirement accounts as well as in non-IRA accounts. The advantage of non-IRA investments is tax deferral compounding of interest. If you buy a CD in a non-IRA account, taxes have to be paid yearly on the interest earned.
There are surrender charges if you decide to withdraw the funds prior to the end of the specified contract period. However, even during the surrender charge time period, most MYGAs allow you to take some money out without penalty. Terms vary, and it is important for you to understand them.
MYGAs are insured by state guaranty funds, not by the FDIC. Make sure your MYGA is issued by a quality carrier.
If you are interested in MYGAs, I recommend you consult with Stan Haithcock (stantheannuityman.com), an annuity expert who can explain the pros and cons of investing in MYGAs. I have worked with Haithcock for many years. He only recommends MYGAs consistent with investor objectives.
(Elliot Raphaelson welcomes your questions and comments at email@example.com.)
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