What Got You Here Won’t Take You Where You Want to Go

Retirees of generations past used to be able to invest with some certainty. Those who worked hard, lived below their means, and saved for the future, were rewarded with a positive rate of return on their savings. They could take their nest egg, put it into a 1 year CD at a bank and earn 5% interest. Or if they preferred the safety of government bonds, they could take that same savings and invest it in 2-year treasury notes at 4%. Either way, this person received a rate of return that exceeded inflation – a positive real rate of return while taking very little risk. In fact, this is what was referred to as “the risk free rate of return.” And it was nice while it lasted.

Today, investors seeking that same “risk free rate of return” are presented with a very different scenario. Instead of the 1-year CD paying 5%, it now pays 0.5%. Instead of the 2-year treasury note paying 4%, it now pays 0.25%. Considering a modest 2% inflation rate, both of these instruments provide deeply negative real rates of return. Can anyone, no matter how much they scale back their lifestyles live on that?
Rather than being rewarded for their prudent investments and actually having savings, these risk-averse investors are essentially being punished. In today’s world, they have traded in the possible risk of losing some of their principle, for the guaranteed loss of their money’s buying power through “safe” investments that don’t keep pace with inflation. So the retiree who used to be able to invest $2,000,000 in 1-year CDs and live off the $100,000 interest per year now only earns $10,000 in interest. That’s a 90% reduction! Again, we ask, “Who can live off that?” And let’s not forget the modest 2% inflation which is eroding that retiree’s purchasing power to the tune of $20,000 per year. With traditional “safe” investments like these providing negative real rates of return, it’s easy to understand why they are no longer viable options.

The message the central bankers and their zero interest rate policies (ZIRP), which are designed to hopefully boost and stabilize the economy is simple, but not obvious to many people. These people are saying, “Take more risk. You have to. It’s a side effect of our monetary policy.”

The fact is policymakers are going to continue to print money. They are going to keep on holding interest rates at such a low level that bonds and bank deposits will continue to yield practically nothing. The message is clear: the only way for investors to have a chance or earning a return is to take more risk.

Investors today are forced to deal with a much greater degree of risk and uncertainty than they were even 10 years ago. Accepting this uncertainty and finding new ways to address it will have a large impact on how successful they ultimately are now and when they retire.

Conscient Capital was built on the premise that the times we live in are unlike any other era in our lifetimes and that they require an alternative vision for investing. We aren’t trying to change our reality. We’re trying to work with it rather than against it. This approach requires a great deal of knowledge, experience, and perspective. And that is what we provide for our clients: Creative, critical, and independent thinking; an alternative to the status quo.

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This post was written by Conscient Capital