Are Zero Interest Rates Good?

Zero interest rates are a hot topic on Wall Street these days.

But, are zero interest rates good for your investment portfolio?

Although this question is hard to answer, I’ll do my best.  More importantly, I’ll keep it simple.

To start off let’s break the world of investing into two categories:  stocks and bonds.  Of course there are many more, but we’re keeping it simple.

If your a stockholder things are good.  But, if you, or maybe someone you know, has their money invested in bonds, yikes!

Why you should avoid bonds like the plaque?

To clarify, a good investment is one that provides a return greater than inflation.  Hopefully, your return will be much greater than inflation.  But in the end, beating inflation is very important.

Let’s review what a bond is.  Simply put, a bonds pays interest and promises to prepay the principal at maturity.

Okay, so we have two parts:  interest and principal.

For example, let’s say you bought a $1,000 bond with a 5% interest rate and a maturity of 10 years.  Every year you collect $50 in interest and at the end of ten years your $1,000 is returned to

you.   Simple so far, right?  Your pre-tax return is 5% and all is good!

Well, what if inflation is 2%.  What’s your return now?  To calculate, simply subtract inflation from the interest rate and you get 3%.  So, your real return is 3%.

Another key point is the relationship between a bonds price and its interest rate.  Chiefly, the first thing to remember is that price and interest rates move in opposite directions.  So, if interest rates are near zero, then a bonds price has peaked!

To clarify, right now you will not get a better price for your bonds.  And the Federal Reserve has stated they will buy any bond offered for sale.

But, if interest rates start to rise the opportunity to sell at the peak will have passed.

Conclusion

In the end, the question remains – are zero interest rates good?  As has been noted above, bond prices are at their peak.  Furthermore, the Federal Reserve stands ready to buy any bond up for sale.  Ultimately, you could not ask for a better time to exit the bond market.

In reality, money is leaving the bond market, both government and corporate, at a record setting pace.  As a result, the only game left in town is the stock market.  And not surprisingly, the stock market keeps setting new all time highs.

So, now you understand why.

Looking for a stock that beats inflation

Then, check out MongoDB.  I’ve highlighted this little known company in the past.

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