For investors, borrowers, savers and consumers, rising interest rates and slow economic growth will help shape the outlook for 2014. So where will the opportunities be…and where will the dangers lurk? Bottom Line/Personal asked six top experts for their favorite financial strategies…
- Invest in flexible certificates of deposit (CDs). Their yields are better than what you can get in many savings and money-market accounts, and they offer the possibility of raising your interest rate before the CD matures.
My favorite flexible CDs now…
CIT Bank Achiever Two-Year CDs recently yielded 1.2% and have both a “bump-up” and an “add-on” feature. If interest rates rise, you can request a one-time adjustment to get a higher rate. Also, you have the onetime option of adding an unlimited amount of money to the CD and still retain the right to bump up your rate. Minimum initial deposit: $25,000. BankOnCIT.com
Bank5 Connect has a “Roll-Up” CD that matures in three years. Your money can be withdrawn with no penalty during a 10-day grace period at the end of each 12-month period. Or if you decide to keep your money in the CD, the interest rate automatically increases-from 0.95% for the first year to 1.25% for the second year and 1.35% for the third year. Minimum initial deposit: $500. Bank5Connect.com
- Invest in a junk bond fund with a “duration” of three years or less. This type of fund can provide much higher yields than standard bond funds for investors willing to accept more risk than with standard bond funds—because the junk bonds are issued by companies with relatively low credit ratings—but less risk than a junk bond fund with a longer duration. Duration is a measure of how sensitive the bonds are to changes in interest rates—rising rates cause bond prices to drop, and the longer the duration, the more sensitive the fund.
My favorite junk bond fund now…
AdvisorShares Peritus High Yield ETF (HYLD) gained 11% in 2013 through November 25 and held up well in the volatile second quarter, falling just 0.7% when interest rates spiked. I prefer this new, actively managed exchange-traded fund (ETF) run by 25-year veteran Timothy Gramatovich to passive index funds. So many investors have piled into the junk bond category that you need a manager who can find good values. Recent yield: 7.7%.
BETTER STOCK RETURNS
- Let a top-notch fund manager adjust your stock and bond allocations. Both major asset classes look somewhat risky for 2014. US stocks have returned more than 180%, including dividends, since they bottomed in March 2009 and could pull back sharply at any time. Also, prices of many bonds will get hurt if long-term interest rates jump. So you need a manager of a balanced fund who is good at judging the outlook and adjusting allocations appropriately.
My favorite balanced fund now…
Berwyn Income Fund (BERIX) allows longtime manager Robert Killen to move in and out of stocks, bonds and cash depending on where he sees markets and the economy heading. It has outperformed the Standard & Poor’s 500 stock index over the past 10 years with half the volatility. In the 2008 bear market, Berwyn was down just 10% versus 37% for the S&P 500.
- Buy an index fund that puts a priority on stocks that are bargains. Traditional index funds rank companies by market capitalization—the total number of shares multiplied by the price per share. The bigger the market cap of a company, the more weight it receives in the portfolio. That works great early in bull markets, but less so now that we’re moving into the sixth year of what may be positive returns. The index tends to overweight stocks that already have had big gains, such as Google and Amazon. So it’s best to favor funds that use a different measure to allocate its assets.
My favorite index fund now…
PowerShares FTSE RAFI US 1000 Portfolio (PRF). This ETF invests in the 1,000 largest US stocks according to scores based on averages over the past five years for sales, cash flow and dividends, plus a measure of book value (the value of a company’s assets if they all were sold). Each March, the fund rebalances its holdings, paring back those whose stock prices have outperformed and adding to those who prices have underperformed.
BETTER CONSUMER DEALS
- Consider buying a small or midsize used car. Prices of various categories of used cars soared from 2007 to 2012, but that trend has peaked and is beginning to ease, thanks to a robust recovery in new-vehicle sales in 2010 and 2011. That surge in sales will create a flood of used vehicles for 2014, including about two million off-lease cars. The average price of a three-year-old used car dropped by an estimated 1.5% in 2013 and could drop another 5% in 2014 in some categories (so a car going for $15,000 last year could be $14,250 this year—a savings of $750). The sweet spot: Three- to five-year-old sedans selling in the $12,000-to-$15,000 range including the Chevy Cruze…Ford Fusion…Honda Accord and Civic…and Toyota Camry.
- Consider a personal loan to reduce the cost of debt. Many debt-burdened consumers who are paying high interest rates on credit card balances don’t have great options for lowering those rates. The values of their homes haven’t recovered enough to allow them to qualify for a home-equity loan, and their credit scores aren’t high enough for credit card issuers to offer them 0% balance transfers, which usually require a credit score of at least 750.
Solution: Personal loans are relatively easy to get now at many banks and credit unions. You will need a credit score of at least 620 to qualify for these unsecured installment loans, which you pay off on a fixed schedule (typically over two to 10 years) and that can range from $500 to $20,000, depending on your income. Typical rates are in the 10%-to-20% range—not great, but much better than the 18%-to-30% that many credit cards charge. In addition, simply paying off your credit card debt with this kind of loan could raise your credit score.