By: Bill and Cindi Porter, AILERON INVESTMENT ADVISORS
Q: What are negative interest rates and how could they affect my investment funds?
A: Incredibly, there are over 14 trillion dollars of negative interest rate government bonds held by investors around the world today.1 That means instead of receiving interest payments as an inducement to purchase a government bond, the bond holders will be repaid less than the amount they invested. Those “investors” have volunteered to lose money. Why would they do that?
The answer may be that some people believe that the next potential financial collapse could have a drastic impact, and they would rather be assured the return of most of their money is guaranteed by the various governments issuing the bonds. Theoretically, it goes something like this: If someone has $100,000 invested in the stock market and another 2008 event happens, they might be left with about $50,000. If instead they had purchased a $100,000 negative interest rate bond which guarantees 98% return of principal, they would eventually have $98,000 instead of $50,000.
However, President Trump’s recent comment that “The Fed should reduce interest rates to zero – or lower” perhaps identifies the real source of the issue. Governments around the world are up to their necks in debt. During the eight years of the Obama administration, the U.S. debt nearly doubled from the prior 232 years to almost $20,000,000,000,000.3 President Trump has continued the fiscal folly. Like a credit card with a minimum monthly payment, governments must also make its required debt payments, or it would default like Venezuela. The higher the interest rate, the higher the required government payment. If interest rates were lowered, the required payments would also be lowered. Negative rates would reduce the government debt because they would pay back less than the funds they received for their bonds.
Artificially low interest rates can affect many investments. A serious discussion with a qualified financial advisor about your current financial situation would be time well spent.
This is for education only. Before using this information in any way discuss it with a financial professional. There are many risks associated with stock trading. You may lose some or all of your financial investment. Securities offered through Dempsey Lord Smith, LLC Member FINRA/SIPC. Securities offered through Integrated Financial Planning Member FINRA/SIPC. Advisory services offered through Dempsey Lord Smith, LLC. All the information in this letter is published in good faith and for general information purposes only. We do not make any warranties about the completeness, reliability and accuracy of this information. Any action you take upon the information is strictly at your own risk.
Send your investment questions to: [email protected].
All the information in this letter is published in good faith and for general information purposes only. We do not make any warranties about the completeness, reliability and accuracy of this information. Any action you take upon the information is strictly at your own risk.
