By Melanie Hasty-Grant
Life is a Risk
Everything in life is a risk. Everything from taking huge steps to doing absolutely nothing is a risk. Let’s talk in plain English about the risks and rewards of different investments. I’ll start withCD’s. Many folks don’t consider a CD an investment, but it is. Basically, you’re loaning the bank your money in return for a fixed rate of return if held to maturity, (6 months, 1 year, 5 years).
The longer you loan the bank your money, the higher the interest rate you get. Right now, the national average for interest on a 6 month CD is .44%, 1 year .64%, and 5 year 1.35% (1).
Since it’s guaranteed and backed by FDIC it doesn’t sound like much of a risk. The guaranteed part of a CD isn’t risky but the fact that CD’s are paying so very little is. The reason the low interest rate is a risk to you is because it doesn’t offer you enough to keep up with inflation. It’s called inflation risk and it’s very real! A few years ago we paid about $1 for a gallon of gas. Today we pay more than $3. The average inflation rate is about 3% a year. If you’re not making at least what the inflation rate is…..you’re losing money.
Okay, now lets move on to bonds. Typically, folks buy bonds because they perceive them to be less risky. The current average yield for a corporate 10 year bond is 2.43%, for a 20 year 3.97%.(2) Sounds like a pretty square deal?!? It can be, but here is the “skinny”. As the federal funds rate and the US Treasury rate go up, the value of bonds go down. Bonds are subject to interest rate risk if sold prior to maturity. Bond values will decline if interest rates rise and bonds are subject to availability and change in price.
The 10 year Treasury note has been at all time lows.(3) If rates go up, prices will go down. (4) What that means to you, if you own a bond, is that the value of what you own will decrease if you don’t hold it to maturity. Another side note is that lots of folks don’t like to buy bonds because of their length to maturity. It can range from 10-20 years or more. That’s a long time to tie up your money.
So, for the grand finale’….let’s talk about the “evil” stock market. When you buy a share of a stock you are really buying into a small piece of a company called a “share”. These “shares” are bought and sold on the stock exchange each day. The value of each share goes up and down depending on how many buyers and how many sellers are trading that company each day.
Folks decide to buy or sell a particular company based upon lots of things. How much profit a company has during a quarter, if that company pays dividends to its shareholders, and other economic and political factors play a role in whether people may choose to buy or sell.
In addition, if the company pays dividends you get to share in the profits of the company. According to the Value Line Survey on the Highest Dividend Yielding Stocks the average dividend for Electric and Utility Industry Stocks is 4.4%. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. The risk of this type of investment lies in the price fluctuation of the shares that you own. It may go way up, it may go way down. This is what we call principle risk. Always remember that “trees don’t grow straight to heaven”. In other words “the market” doesn’t just go in one direction.
The moral of the story is . . . EVERY investment has risk! Such is life. It just depends which risk you are willing to take at the moment. EVERY investment has positives and negatives. There is no Utopia in the investment world. The important thing is that you fully understand the risk and rewards, that you either learn enough to effectively invest on your own, or you hire an expert to do it for you.
Remember . . . Who you trust matters! For more information go to www.waterstonewealth.com or call 918-272-1120.
Melanie Hasty-Grant Managing Principal at Waterstone Private Wealth Management and Experienced Licensed Professional Counselor.
Securities offered through Cetera Advisor Networks LLC, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC a Registered Investment Advisor. Cetera Advisor Networks LLC is under separate ownership from any other named entity.