Financial Q & A

Question: Why are interest rates so low, and how can I invest for income in this age of very low interest rates?

Answer: For the last decade the central banks of countries around the globe, including the United States, have taken actions to keep short-term interests rates near zero in an effort to stimulate economic activity following the Great Recession that began in 2008. These actions have left traditional savers at a disadvantage to risk takers.

Every form of investing has a trade-off between the level of risk (the potential for loss) an investor is willing to accept and the amount of return that is sought. Generally, riskier investments should be given more time to come to fruition. For situations where a higher return is desired–whether it be from income or growth of the investment–and an appropriate amount of risk can be accepted, there are ways to generate higher income. 

Fixed-income securities, also known as bonds, are debts issued by governments and corporations that pay interest on regular intervals and return the investors’ funds at the end of the predetermined time period. Examples of higher-income-paying bonds include those that might be longer in length until repayment, are of lower credit quality or a combination of these factors.

Another option for higher income would be from dividends paid on the common stock of corporations. Dividends are a return of profit in the form of cash payouts to the shareholders (owners) of the company. Currently, there are many publicly traded companies whose dividend payment yield is greater than traditional fixed-income investments. However, common stock investments have a higher rate of risk associated with them as their stock prices can and do fluctuate up and down over time.

For an investor with a longer investment time frame and a proper appreciation for the risk associated with each type of investment, an appropriate balance of assets between differing asset types can increase income and help mitigate the overall risk of doing so.

Contact Leonard Rice to learn all Alpine Bank Wealth Management has to offer you. Call him at 877-808-7878 or email him:  [email protected].

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