Let’s talk about investing in a low interest rate environment

A low interest rate environment is ideal for folks shopping for a mortgage since their monthly home loan repayment will be considerably lower than it would be in a higher interest rate environment.  This is great is you’re buying a home but what if you are looking for places to have your money make you money.

Here’s the challenge:

If the inflation of an economy surpasses the rate of interest of fixed income financial instruments, then it effectively means that investors are losing money rather than gaining any income. So, how can you amass wealth in a low interest rate environment? Diversification of investments may be the answer investors are looking for.

 

Why Is Diversification Important?

If you have a good amount of savings in the bank, it’s wise to consider other avenues of investments such as shares, bonds and property. Why is diversification important?
1.  Persistently low rates means that investors need to look beyond fixed income into better yielding asset classes for higher investment returns.
2. Reduces risk by spreading your money across different investments and asset classes.
3. By spreading your money across investments, you have a chance of getting high-yielding returns on some investments that may outperform expectations.

What are the Different Investment Avenues in a Low Interest Rate Environment?

Some choices are better than others when it comes to investing in a low interest rate environment.  Here’s 3 areas to consider:

Stock Market 

Shares have the potential to provide robust returns in a low interest rate environment.  Although shares subject the investor to a potentially higher investment risk, the potential for larger gains is far higher.

Short-Term Bonds

Many high net worth investors choose to buy bonds because of the perceived high level of safety.  Short-term bonds and interest rates don’t affect each other drastically, making them a good choice in a low interest rate environment. This is because bond investors will at least get their principal amount back on maturity, in addition to the interest payable during the term.  Buying bonds is a viable alternative for those who want to get into investing without the volatility that comes with the stock market. Choosing the best bonds to buy depends on the investment appetite of every individual investor, the length of time of the bond investment and the creditworthiness of the bond issuer.  Bond interest rates depend entirely on the issuer, but typically corporate bonds give higher interest rates than government issued bonds.

Property Investments 

Low interest rates make mortgages an attractive proposition for investors who want to get a piece of the real estate pie.  Rate reductions make real estate investments affordable, but make sure that you get a loan that is going to make sense for your investment objectives.  A super low adjustable rate mortgage may seem like a great idea now but if interest rise dramatically so will your monthly payments.  It very well may make sense to get a fixed mortgage with interest rates so low.  That way you will have the comfort of knowing that even if we find ourselves in an environment of interest rates rising, in the future, your monthly mortgage payment will stay the same.

Bear in mind that every investor has a different goal and timeline, so it’s important to come up with a tailored investment plan to suit your risk appetite.  It may be beneficial to consult with a Financial Advisor to help you come up with a specific plan but just remember at the end of the day no one cares about your wealth more than you.