Savings: Searching for a safe haven
Long-term savers “can no longer count on traditional havens such as savings accounts, certificates of deposit, Treasury securities, or money-market mutual funds,” said Allan Sloan in The Washington Post. That’s forcing savers into riskier stock market bets. If you want to rely on income from your investments, the dividend yield on an S&P 500 index fund is currently almost triple the yield on a 10-year Treasury note. But that “dividend yield comes with serious risks.” Last month, the S&P twice dropped at least 2.4 percent in a single day. “That means more than a year’s worth of dividend income from your index fund vanished on two separate occasions in one week.”
It’s not just individual savers who are in trouble from the low rates, said Brian Chappatta in Bloomberg.com. Many definedbenefit pension plans count on annual returns of 7 to 8 percent, and today’s below-inflation rates “won’t cut it.” Right now, no one wants to buy bonds, and pension funds, which hold $12 trillion, are close to revolt. Bank of America analysts wrote recently that pension funds are unlikely to “buy into the Treasury market until yields rise by ‘at least’ 50 basis points,” meaning the 10-year rate would have to nearly double. Before the pandemic began, state pension shortfalls across the country already stood at more than $1 trillion, said Adam Schuster in the Chicago Tribune. The pandemic has taught us that we must
“build more resilient pensions that automatically adjust benefits to match changing economic realities.” A blank check from Congress won’t solve the problem. “If a state has more pension debt than it can pay off over 25 years without increasing taxpayer costs,” it should “have to commit to making pensions sustainable and affordable.”
Another safe haven, money-market funds, today are paying almost nothing, said Jeff Sommer in The New York Times. Long considered one of the best places to stash cash, these funds have seen yields plunge to nearly zero. And if you consider the fees—which some fund companies have started waiving—yields could actually fall “into negative territory.” Money-market yields were extraordinarily low during the financial crisis too, and that was “expected to be temporary but lasted for years.” Corporate bonds, meanwhile, used to mean “no risk, no volatility, no worries,” said Brett Arends in MarketWatch.com. Well, “no more.” If you are looking for a regular stream of income, your best bet now is probably in blue-chip stocks, especially ones that are somewhat insulated from the gyrations of the market. For the best dividends, avoid banks and oil, and consider telecom and consumer goods. And look beyond the U.S.: The most reliable dividends now come not from here but from companies in Europe and Japan with “cast-iron” balance sheets.