This Investment Will Destroy Your Buying Power

Marc Lichtenfeld
by Marc Lichtenfeld, Chief Income Strategist

Last week, while speaking at a conference in Washington, D.C., I told the audience that a 10-year Treasury bond is about the most dangerous thing you can have in your portfolio.

Not because I think the United States is about to go belly up and not pay its debts. A Treasury is still the safest thing you can own, if you want to ensure you get your principal back.

But owning Treasuries is all but guaranteed to destroy your buying power.

Here’s what I mean. Today, the 10-year Treasury is paying 1.61%. The most current inflation rate is 1.99%. So even at this ultra-low level of inflation, a 10-year Treasury bond doesn’t keep up with the rise in prices.

In 2012, the average rate of inflation has been 2.13%. The 10-year Treasury misses by over half a percentage point. And don’t forget, you pay taxes on Treasuries, reducing your return even more.

Let’s look at a few different scenarios so you can see by just how much your buying power is destroyed owning Treasuries.

If you buy a 10-year Treasury today, at the end of 10 years, you will have $1,161. You’ll have received $161 in interest and will have your original $1,000 returned.

But if inflation averages 2.13% over the next 10 years, what costs $1,000 today will cost $1,234 in 2022. If inflation ticks up to 2.4%, still a full percentage point below the historical average, you’ll need $1,267. At 3.4%, the historical average since 1914, you’ll need $1,397. And if all of this quantitative easing drives inflation above the average rate, to let’s say 4%, you’ll need $1,480 in 10 years to buy $1,000 worth of today’s goods and services.

Inflation Rate Necessary Funds
2.13% $1,234
2.4% $1,267
3.4% $1,397
4% $1,480
1.61% 10 yr. Treasury $1,161

 

There are plenty of higher-yielding alternatives to Treasuries. You can buy a muni, a corporate, or a blue-chip dividend-paying stock. But, they all involve more risk. The reason Treasuries pay so little is because they’re the safest investment out there.

However, to lock up your money for 10 years at 1.61% per year is simply ludicrous. As I’ve shown you, even at incredibly low levels of inflation, your money will be worth less over the years than it is today.

Of course, you can always sell a Treasury, but if rates go up, the value of your bond will fall. Then you have to decide if it’s worth it to sell at a loss in order to invest the remaining funds at higher rates, or wait the 10 years to get your money back, even though your buying power is being destroyed along the way.

Instead of keeping your money held hostage for 10 years, consider settling for a little less interest – but having complete liquidity. You can get your money any time you want, with no penalties.

There are money market funds out there paying 1% or more. They give you the flexibility to access your funds whenever you need, but pay a higher rate of interest than you can find most places, including CDs.

They’re not easy to find, but they do exist. My favorite is the money market offered by EverBank. It pays an astonishing 1.25% (about what you’d get in a three-year CD). Plus, for being an Investment U reader, you can get an additional 0.1%, bringing the rate up to 1.35%.

Full disclosure: Investment U has a financial relationship with EverBank and may receive compensation for new accounts.

However, I can tell you, that when I saw that rate, I moved a considerable amount of my own cash out of another financial institution in order to get that 1.25% offered by EverBank. It was only after I received that offer that I was able to negotiate an extra 0.1% bonus for Investment U readers.

There’s only one catch – if you want that extra 0.1%, you have to call them. Go online to read all of the terms and conditions. But to get the bonus 0.1% that brings the rate up to 1.35%, you must call their dedicated concierge team at 1.855.283.1795 and give them REFER ID: 13571. That REFER ID is the only way to get the bonus rate, so be sure you call and give them REFER ID: 13571.

Even if you decide not to take advantage of EverBank’s 1.35% money market rate, find an alternative to Treasuries. Otherwise, it’s like watching your wealth drip down the drain, one drop at a time.

But at 1.35%, the EverBank money market is an excellent choice to safely park your cash until you find alternatives to wealth-destroying Treasuries. And considering you’re only sacrificing 0.25% for complete liquidity rather than a 10-year holding period, it’s a no-brainer.

Good Investing,

Marc

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