In response to the financial collapse of 2008, the U.S. Federal Reserve Bank (The Fed) dropped interest rates to almost zero to help make cheap money available to business, to the public, and to the banking system. The Federal Reserve Bank Chair, Ben Bernanke, recently promised that this low interest rate policy would stay in effect until U.S. unemployment numbers improve significantly.
This low interest rate policy has hurt savers and seniors who typically rely on FDIC insured bank deposits for a safe source of income. Most insured bank deposits do not yield anything close to the current rate of inflation at 1.7%, so savers with insured deposits are losing money. This situation forces income seekers to look elsewhere.
By design, the Fed policy is forcing people to look at risk assets that yield more than the rate of inflation. Risk assets also have the history and the potential to create wealth through appreciation in price and value. Of course, wealth creation will help the U.S. economy.
In response to the low interest rate policy, we have developed a Cash Reserve Management Strategy (Fixed Income – Class 5), which emphasizes short to intermediate-term bond funds. The funds that we are using to generate income from cash reserves do not contain stocks.
If more risk than the bond market provides is appropriate, then dividend-paying stock funds are also a popular income alternative.