Smart Money: It's time to take risks
William C. Fisher
The reaction for some has been to only purchase CDs or low-risk investments. A Bank Administration Institute survey of national CD rates on Dec. 1 shows there yields varying from 0.32% for three months to 1.87% for five years. Low-risk investments like CDs are not going to provide the income or returns needed by providers if inflation returns in the years ahead.The Federal Reserve is trying to induce investors to take more risk with their investments by keeping interest rates on Treasury bonds at almost nothing. Economists say the nudging could drive up the stock market and give corporate executives the confidence to invest in equipment and hire people.
But this strategy leaves those nonprofits investing only in CDs or Treasuries in a tough situation. According to a recent comment from Gregory Seals, former director of fixed income for the CFA Institute, a global nonprofit organization that represents investment professionals: “If you want to be a low-risk investor, there is nothing for you.”
He goes on to say if an investor buys a five-year Treasury bond, and interest rates go up 1%, the price of the bond will go down 4.5%.
If a 10-year bond is purchased and rates rise 1%, the results are worse, with the bond price falling by 8 to 9 percent. (This is true if the bonds are sold and not held to maturity.)
Here are two potential solutions the CFO can discuss with an investment adviser (if the investment policy allows it): Hold a mixture of bonds from corporate to foreign. The variety of yields and maturities might moderate the volatility if interest rates jump sharply. An investment adviser also might recommend preferred stock to potentially enhance overall returns if interest rates rise.
William C. Fisher is president of Investment Advisory Group LLC, a business development company partnering with some of America's leading financial companies to provide independent financial services to nonprofit organizations.