Investors: How to Take Advantage of Low Interest Rates

When 2020 began, few market participants — from your average retail investors to institutional funds and bond market financial savants — saw interest rates returning to all-time lows.

Not four months later, interest rates weren’t just low, they were back at zero. In March, the Federal Reserve took dramatic action to combat the pandemic and the expected economic fallout.

The Fed went on to say these low interest rates would likely hover near rock-bottom levels for years, and that the central bank would wait for full employment and meaningful inflation to return before raising them.

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With the unemployment rate well into double digits, getting back below even 5% or so could take many years, as it did following the 2008 financial crisis.

Given this landscape, what’s an investor to do? How can investors take advantage of low interest rates? As fixed income investors have a harder and harder time finding assets providing any meaningful yield, a number of other investment opportunities tend to look more attractive. Here are a few investment options to explore in a low interest rate environment:

— Gold and precious metals.

— Large-cap stocks and dividends.

— High-grade corporate bonds.

— Refinancing can make a difference.

Gold and Precious Metals

Precious metals are arguably some of the most popular investment options in the investor’s low interest rate playbook. The current combination of easy money policies and an uncertain economic outlook also play into gold’s favor.

“Gold is perceived by investors to be one of the best investments, recovering quickly from economic downturns,” says Spencer Campbell, director at SE Asia Consulting Pte Ltd. Oftentimes, the price of gold “also runs counter to stock market or economic fluctuations,” Campbell says.

Gold prices have hit new all-time highs in 2020, reaching more than $1,950 per ounce. While it’s a commodity that’s definitely difficult to value, some mainstream ratios used to value the precious metal indicate there could be more room to run, says Charles Self, chief investment officer at iSectors.

“The S&P 500 to gold price ratio is slightly above the average over the past 50 years,” Self says. The current economic uncertainty, low interest rates and dramatic increases in the money supply might indicate there’s room for this ratio to fall, making gold outperform equities. Self sees a risk of this ratio returning to the lows seen in 1980 and 2011.

[SEE: 7 Gold Stocks to Buy as Prices Soar.]

“Given that precious metals have no significant correlations to equities or bonds, portfolio managers are just starting to implement allocations to precious metals as another diversifier to stocks, besides bonds,” Self says.

And it’s not just gold that stands to benefit, but other metals, too, Self adds.

“At iSectors, we believe that the best way to take advantage of this situation is to own a diversified portfolio of precious metals. This portfolio would include gold, silver, platinum and palladium,” Self says.

Large-Cap Stocks and Dividends

Luis D. Alvarado, investment strategy analyst at Wells Fargo Investment Institute, thinks the current low interest rate environment is similar to the one seen after the financial crisis, providing incentives for investors to “invest in risk-on assets,” and that “equities are definitely at the front and center.”

“Consider exposure to equity sectors with higher-quality earnings,” Alvarado says. “Within the U.S. asset classes, we prefer large- and mid-cap equities over small-caps — as larger companies generally have higher cash balances, lower leverage and better earnings growth than their smaller counterparts.”

Stable large-cap dividend stocks are even more attractive these days, with the 10-year Treasury yield now around 0.6%, plenty of quality dividend stocks with yields between 2% and 5%, and higher in some cases, can be readily found on major U.S. exchanges.

High-Grade Corporate Bonds

While parts of the investor playbook for a low interest rate environment remain the same in 2020, there’s still an unusual amount of uncertainty in the air. No one knows what the long-term fallout for small- and medium-sized businesses or the labor market will be.

Stocks, while generally offering high long-term returns, also come with more risk, and that might not be desirable for some cautious investors.

“Manage volatility with income-generating assets,” Alvarado recommends. “As the recovery continues, yield will be in demand. Investment-grade and high-yield corporate bonds may be poised to perform well” during the post-pandemic recovery, Alvarado says. He adds that this asset class will also benefit from an unprecedented level of direct support from the Federal Reserve in the form of bond buying.

Refinancing Can Make Sense

Although perhaps more a matter of personal finance than investing, it’s worth mentioning that refinancing your mortgage can make sense in a lot of scenarios these days.

“One of the best ways you can take advantage of these low interest rates is to refinance your mortgage,” says Craig Kirsner of Stuart Estate Planning Wealth Advisors.

With the rate on 30-year mortgages recently hitting all-time lows below 3%, Kirsner notes that the math is firmly in current borrowers’ favor when it comes to refinancing. In some cases, 30-year mortgages could be refinanced into 15-year mortgages and the borrower would still have a lower monthly payment.

The long-term savings can be great here, and if savings on monthly payments are invested in low-fee index funds, for instance, the long-term financial benefits would be even greater, Kirsner says.

[READ: Investing in REITs in a Recession.]

2020’s Low Interest Rate Playbook

Every recession has its own texture, but navigating a pandemic-induced global recession in the 21st century is unprecedented in essentially every meaningful way. The Fed’s commitment to propping up the economy by printing trillions of dollars, propping up the bond market and keeping rates at zero seems to have provided a safety net for markets. But at the end of the day, the central bank can’t subsidize everything under the sun.

Some investments, like certain real estate investment trusts, known as REITs, are generally notable beneficiaries of low interest rate environments. While it’s possible they will be again, it’s more important to maintain some degree of conservatism and flexibility in this particular instance.

With inflation still rather low, keeping some cash on the sidelines and maintaining a portfolio of more liquid investments should be one of the underlying principles helping to guide any investor navigating today’s low interest rate era.

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