March 05, 2021
What About Low Interest Rates?| Risk and Opportunities of Low Interest Rates
What about Low-Interest Rates? What is good and what is not with Low-Interest Rates?
In today’s episode of Daily Wisdom to learn more about what are the risks and opportunities of low-interest rates.
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Episode Transcript
Low Interest Rates
So right now, I don’t know if you know, but interest rates are pretty darn low, and there’s some good things and bad things with that.
One of the good things is if you’re looking at doing a refinance or a mortgage right now, you can get some really, really great rates. I’ve seen as low, below 3% where I think someone refied, and they had 2.75% which, if you look at it, that’s really cheap money. And so what some people are doing is refinancing, and then you could invest that money somewhere else where it could be earning 4%. So just from arbitrage, you’re making out. But then also, you have the compounding interest effect as well. So that’s been nice for a lot of people, and they’re taking advantage of doing that refinance in the house.
The Downside of Low Interest Rates
Now with the low interest rates, there’s two things. One kind of negative thing is that a lot of people have invested in kind of the 60-40 portfolio as they get near retirement, and there was a recent Forbes article that actually talked about this, with idea that 60% is in equities and maybe 40% of that is in bonds. Well, the problem is with the low interest rates, bonds are really underperforming. And so that traditional, call it 60-40 portfolio, if we know that 40% of it is really underperforming, maybe we look at bond alternatives, and there’s a variety of different ways that we can kind of analyze this. But the idea is that that 40% that we have sitting in bonds probably isn’t performing the way it should, and maybe we should look at some other options. So that’s, with the lower interest rates, that’s kind of one of the downsides with it.
And then where this question came from is that depending on how, say, an indexed universal life or a fixed indexed annuity is set up, they’re also looking at interest rates as well. And so with these different types of investments, when they’re looking at index, we have to be careful at which indexes we’re looking at because those could be affected by the lower bond rates.
Refinance Option
So a little bit, I guess, kind of pulling back the curtain to a certain extent, a little in the weeds with that, but with the lower bonds underperforming right now, we need to… or with interest rates underperforming a little bit right now, there’s some risks and opportunities that we should be aware of.
One is maybe looking at a refinance. Two is if you have a portfolio that’s heavy in bonds, that might not be the best option right now, and we can help you take a look at that. And then third, understand that if you are looking at a product that has indexing like indexed universal life or fixed indexed annuities, you have to be careful on which indexes you’re selecting because again, based on the low interest rates, that’s going to have a lot of odd effects on some investments.