Beware of Falling Interest Rates?

Interest rates continue to fall with no floor in sight.   Japan and Germany currently have negative rates while the yield on the five year U.S. Treasury note is 1.05%.  How can you take advantage of falling interest rates?

Here are a few suggestions.

Bonds.  If you have owned bonds for the past few years, you’re likely sitting on some capital gains.  It may be worth it for you to sell some bonds and lock in gains.  Let’s say you purchased a bond paying 5% at a price of $100 a number of years ago and today it’s worth $105.  You can sell your bond and lock in a $5 capital gain.  

Refinance.  It may be time to refinance your mortgage.  According to Bankrate the 30 year fixed rate is 3.66%.[1]    Let’s say you owe $300,000 on your home with a current mortgage rate of 5%.   Your monthly payment is $1,610.46.  If you refinanced at 3.66%, your monthly payment will drop to $1,374.07 saving you $236.38 per month or $2,836.56 per year.

Mortgage.  If you still have a mortgage and you’re sitting on a pile of cash, you should explore paying it off.   By paying off your mortgage you’ll increase your monthly cash flow and save a ton of money on interest.  For example, after ten years you decide to pay off your $300,000, thirty-year mortgage with a 5% rate.  Eliminating your mortgage will save you $1,610 per month or $19,320 per year. In addition, you’ll save over $175,000 in interest by paying it off twenty years before it’s due.

Gold.  With zero interest rates in the U.S. and negative rates overseas it may make sense to purchase gold coins.  Gold coins can be used as a portfolio hedge and give you some exposure to alternative investments.  In addition, the coins can be used as a family heirloom passed down to future generations.  They’re also neat to hold and admire.  The best place to purchase gold coins is directly from the United States Mint at www.usmint.gov.  The current price of the American Eagle 2016 One Ounce Gold Proof Coin is $1,610.[2]

Dividends.  According to Morningstar, there are 192 companies currently yielding over 2% that have raised their dividend by 10% per year.

Preferred Stocks.  Allocating a portion of your fixed income portfolio to preferred stocks will give it a boost.   There are currently two preferred stocks exchange traded funds yielding over 5.25%.

Charity.  Falling interest rates coupled with a large cash holding is a good recipe for giving money to others.  A charitable donation to your Church or favorite organization will help others and do some good.  You will also receive a tax deduction for your generosity.

As interest rates continue to fall look for ways to help others, reduce your expenses or allocate your cash to higher yielding investments.

The man who had received five bags of gold went at once and put his money to work and gained five bags more.  Matthew 25:16.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. www.parrottwealth.com.

June 15, 2016

[1] http://www.bankrate.com/  Accessed 6/15/16.

[2] http://catalog.usmint.gov/coins/gold-coins/ Accessed 6/15/2016.