By Al Schiliro, Senior Investment Officer
“Rates are too low” is a statement that seems to be echoing among investors in the current economic environment. Another popular phrase we’ve heard across the industry is “The economy will turn around and rates will go back up.” Behavioral finance might define such phrases as “anchoring” – the common human tendency to rely on one piece of information or a cognitive bias toward a psychological benchmark. Forms of anchoring include basing present-day decisions on past – or anchored – experiences, with no consideration to the current environment.
For example, let’s say you were exploring personal investment options, with a specific interest in Tesla stock. In March, Tesla stock was trading at $400 a share. Many people might have decided it was too expensive and avoided it. Now, only four months later, the stock is worth almost $1600 per share. The investment world is filled with stories like this. One main reason is that investing in any asset category is an endeavor that requires critical thinking to look at the probability of future outcomes. Investing is an inherent process of making decisions with incomplete information.
As an investor goes through the decision-making process, it is best to remove emotion, political bias and anchoring tendencies. As former U.S. Secretary of Defense Donald Rumsfeld once said, it’s important to focus on the “known knowns.” What do we know? We are in the midst of a global pandemic. Period. When will it end? No one can answer that at this time. We’re hopeful that a vaccine will be developed in the near future, but we still do not know when it will be deemed safe and effective. We must also consider manufacturing and distribution. How long will all that take? Again, at this point, we do not have answers to these questions. However, never before have we had the world’s brightest minds united behind one cause and working together toward the same goal – a vaccine.
What else do we know? Federal Reserve Chairman Jerome Powell recently went on record stating that the Fed is “not even thinking of thinking about raising rates,” and doesn’t anticipate an increase until sometime in 2022. Most credit unions are earning approximately .01 percent to .05 percent in cash. Most term instruments, like SimpliCDs, share certificates, mortgage-backed securities, callable bonds and bullet bonds are paying better than cash. Yes, rates are low, but the income earned by investing is still tenfold of what credit unions are earning in cash. The reality is that the return is a multiple of what cash is paying. As each month passes without a breakthrough to control the virus, generating income from loans will become more challenging and every dollar earned will take on more significance.
It is important to make investment decisions based on strategy rather than speculation. Stating that rates are going to turn around without knowing when, is not only speculating, it also presents a timing issue. Then the question becomes at what rate do you put money back to work? If rates go up .10 percent or .20 percent, do you allocate funds, or do you wait in case they’re increasing? The process starts to become more encumbered and investors tend to freeze. Before you know it, a good amount of time has passed, and the credit union is still sitting in cash at a much lower rate of interest income.
Catalyst Corporate’s team of trusted Investment Officers have the knowledge and industry experience to help credit unions navigate various economic climates. For a complimentary review of your portfolio or more information on our services, contact us today.
All securities are offered through CU Investment Solutions, LLC. The home office is located at 8500 W 110th St, Suite 650, Overland Park, KS 66210. CU Investment Solutions, LLC registered with the Securities and Exchange Commission (SEC) as a broker-dealer under the Securities Exchange Act of 1934. CU Investment Solutions, LLC is registered in the state of Kansas as an investment advisor. Member of FINRA and SIPC. All investments carry risk; please speak with your representative to gain a full understanding of said risks. Securities offered are not insured by the FDIC or NCUSIF and may lose value. All opinions, prices and yields are subject to change without notice.