You Are Forced To Invest in Risky Assets

Mortgage rates history

Bank CD Rates


















Take a good hard look at the charts above. While mortgage and CD rates were over 10% in the mid 1980’s, mortgage rates have dropped to between 3 and 4 % starting in the 2010’s and the bank interest rates have fallen to around 0.1%. The problem with the current investment environment today is that there really is no where to get a great return except for higher risk assets. Stocks and bonds both carry risks, and have been heavily pumped up due to the lack of alternatives such as existed in the past. Central banks have been pushing people with assets to invest in the stock market for quite some time now, as such investments ostensibly drive economic growth and also people’s retirement accounts.

Retirement accounts in the US are not the same as they were  in the past – in 1980 the 401k accounts were started by private companies take take advantage of section 135(a) of the Revenue Act of 1978. This became a trend among companies across the US and is now the standard. Companies would much rather have individuals put money into their 401k than be obligated to support them after retirement. The 401k is a type of defined contribution plan rather than a defined benefit plan. Federal law does not require employers to offer or to continue to offer a plan, but most white collar jobs do come with this benefit.

The IRS dictates that 401k beneficiaries being distributions at a certain age. The rules are a bit different for designated beneficiaries, but they should be closely followed otherwise penalties will be imposed. If an employee decides not to invest in a 401k, he or she does not receive any taxable benefits offered by the 401k which could either be:

  1. Untaxed deferrals to the 401k plan
  2. Untaxed gains for the Roth 401k plan

In short, money that goes into the normal 401k plan is not taxed up front but instead when removed from the account. Money that goes into the Roth 401k is already taxed but doesn’t get taxed when removed. Entire industries are supported on fees and administration costs related to people’s 401k accounts – if you haven’t yet, you should check out how much money you are charged for keeping money invested in each mutual fund, bond, ETF, etc. you are holding. Deciding to put your 401k money in fixed income will yield you close to nothing, but having money invested in international funds generally is more risky.

Unfortunately for the saver of today, the best investments tend to be stocks or real estate. Gone are the days of investing in bank CDs, at least in the US. If you’re looking overseas many countries still have double digit interest rates you can get on savings, but those countries tend to have higher inflation too.  Keep in mind holding a foreign bank account you will need to report your assets with the IRS using the FBAR form.

cd rate



How To Get Out

The bull market that has basically defined the past six years seems to have stalled. After recording no gains for December or January it remains to be seen whether or not the market is experiencing a temporary lull or has reached a summit. With the Federal Reserve expected to raise interest rates in June, one can only expect that the market will push down further in the medium-term.

What should you do if you’re currently holding stocks but want to get out? First of all, don’t panic – you should assess your situation and deal with it accordingly. This article is catered for strategies of liquidating stock holdings so if that is not your plan then please read one of my other articles!

Scenario 1: Holding lots of short term stocks

Answer 1: If you’re holding a lot of short term stocks and want to get out, you should first determine if you have any capital gains on those stocks. If you are selling at a loss, then go ahead and sell these stocks now and make sure to record your losses in order to benefit from capital loss carry-overs in the future. If you’ve made a lot of money off of these stocks and are in a high tax bracket you can sell with the knowledge that you will be paying high tax on these gains or buy put options for these stocks that expire when you can sell these stocks as long term gains.This really only works when that date is in the near future, since put options’ price is largely influenced by a factor of time. If you have to wait six more months before selling it usually does not make sense to buy put options since the cost of those options may trade at around 20% of the stock’s price. In the case of Apple, which has gone up 20% in the past six months – it’s $115 put options trade at around $11 dollars per share, which upon purchase would cut a 20% profit into only a 10% profit, which would only benefit those who are paying more than 50% short term capital gains tax (I’d hate to live in an area where my combined federal/state/local tax is that high!).

Scenario 2: Holding lots of long term stocks

Answer 2: Sell them! You’re going to have the pay the long term capital gains someday anyway and might as well sell when you think they’re most profitable!

Scenario 3: Have no brokerage accounts, but instead have lots of money in a 401k primarily invested in stocks

Answer 3: You should be able to reallocate your money into bonds or fixed income assets. Bonds have higher returns but more risk than fixed income. Unfortunately most 401ks do not allow individual choosing of bonds, instead offer a choice of bond funds. Bond funds will fare differently dependant on the length these bonds are held for. Long term bonds will fare poorly if the Federal Reserve increases the prime interest rates since the bonds themselves are locked into a lower interest rate.