Financial Planning
April 19, 2023

Savings Account Alternatives

Market volatility has some people shying away from investing in stocks in favor of squirreling money away in banks. But savings accounts alone won’t net you much return.
Stewart Willis

I’ve said it before, but we are spoiled when it comes to recent stock market returns. Until recently, we saw one of the best market environments in history. Investment portfolios swelled, interest rates plummeted and even people who knew nothing about investing and made questionable decisions often made money. It was, as they say, a heckuva of a ride.

But that came to a screeching halt a little over a year ago. Markets dropped sharply upon entering an extended period of high volatility. Global inflation struck, resulting in the Federal Reserve raising interest rates throughout much of 2022 and into 2023, with no end yet in sight. 

Amidst all the noise, we keep seeing troubling economic news such as tens of thousands of tech industry workers being laid off, along with increasing numbers of employees in other industries. Even McDonalds, which by its own admission is “in the strongest position it has been in years,” with nearly $2 billion of net income in the fourth quarter of last year, laid off hundreds of corporate workers and slashed pay for many more. 

When people get nervous about their investments, one of two things often happens: Either they pull all their positions out of risky investments preemptively, or they wait until the market drops and then sell out of panic just when prices are at or near the bottom. Of those two options, the former is by far the better choice, but that doesn’t mean it’s the best one. 

That isn’t to say investing in “safe” vehicles such as CDs, bonds and annuities is a bad idea; rates of return on many of those products are the best I’ve seen in my entire career. We’re in the middle of a short-term interest rate spike, which is unfortunate if you’re planning to finance a car or a home, but great news if you’re planning to invest in interest rate-linked assets.

It’s possible today to get an annuity or a CD that pays more than 5% interest. I bonds are sitting at 6.89% through the end of April 2023. Such rates were unheard of even one short year ago, which makes these products much more attractive than they’ve been in a very long time. However, as with any investment, it’s important to do your homework.

I frequently encounter clients who have purchased annuities that don’t perform as well as expected, because they didn’t consider the particulars of the annuity. Often, the gains from the annuity are at least partially offset by unnecessary riders. For instance, if you don’t need income from your annuity, it doesn’t make sense to have an annuity with an income rider, yet many do. It’s common to see an extra 1.5–2% built into the product with riders, and that’s money that could have gone to you instead.

The good news is that there are many more choices now than ever before. A recent influx of accumulation products that don’t rely on riders at all means you can easily find a product with an overall yield that is much more favorable than those with riders. To do so, it’s important to carefully consider who is telling you to buy a product. 

As I’ve said before, if your broker is making money based on selling you specific products, they may not be putting the best results for you at the top of their priority list. Asset Preservation Wealth & Tax is what’s known as a fiduciary, which means we are obligated to consider the best outcome for our clients as our highest priority. By working with a fiduciary advisor, you can at minimum be assured they won’t be trying to sell you a product just because they’ll earn a commission.

Diversification is Still Important

As with most things in life, even “safe” investments like annuities or treasury bonds carry risk if you focus on investing exclusively in them rather than diversifying your portfolio. After all, a safe investment with a maturity date is only safe if you don’t need to access the money before it matures. If you’re exclusively invested in long-duration products when an emergency requires you to access a large amount of cash quickly, you risk having to pay taxes and penalties for early redemption of those investments. 

This risk can be reduced if you balance your safe investments through varying duration products. Shorter-term CDs, bonds and other low or no-risk investments can provide you with access to cash if you need it while still growing your money at higher rates than savings accounts. 

One thing to keep in mind, however, is that while short-duration low-risk investments have, compared to historical products, stellar rates of return now, this does not mean they will continue to have such returns forever. When interest rates go down, rates on these products also drop, often rapidly. Viewing short-term investments as though they are long-term holds is an almost surefire way to be disappointed eventually. 

When that happens, frequently markets move in the opposite direction; as interest rates drop, the market rises. This leads to another common mistake, the “Buy Low, Sell High Inversion.” From an early age, most people learn the way to make a profit is to buy something at a low price and sell it at a higher price. All too frequently, however, the opposite happens with investors in the market. 

People see the market rising rapidly, and want to get in on the gains. Similarly, when they see the market falling, they want to divest because they fear further losses if they stay in. The problem is that once you’ve observed the market rising, you’ve already missed out on gains. Once you observe the market falling, you’ve already experienced losses. In short, you risk buying high and selling low!

This is why I frequently remind clients that investing should not be about timing the market, but about time in the market. Historically over time, the market has always gone up. By staying invested for the duration, you increase your likelihood of coming out ahead versus trying to buy and sell when you think — hope — conditions are most favorable.

The same concept holds true when seeking safe harbor in cash-forward investments like CDs and bonds. If you’re trying to shelter in cash while the market is down or volatile and planning to reenter the market when conditions become more favorable, the problem becomes, when do you reenter? If you guess wrong, you stand to lose a lot of money.

Balance in All Things

The central conclusion to the question of where to invest when you’re concerned about the market is to maintain a balanced portfolio. You’ll probably note that this is the same advice you should follow when you aren’t worried about the market! A properly-balanced portfolio will help you ride out the bad times while enjoying gains from the good times. 

Chasing “hot” investments when times are good might make you more money in the short term, but as many learned when the markets became volatile after the pandemic struck, remaining profitable with an imbalanced portfolio becomes much less likely when those good times end. 

Similarly, structuring your portfolio in favor of extreme safety may keep you from losing when times are volatile, but at the expense of being able to take advantage of gains when the market swings upward. This is why, at Asset Preservation Wealth & Tax, we advise our clients to maintain balanced portfolios to protect them both from suffering more than necessary in downturns, and from sitting on the sidelines while others reap profitable rewards during upswings.

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

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