Money Matters: Honey, They Shrunk the Interest Rates

You have money in the bank earning 3.5%, and it’s killing you.

It’s not even that the interest rate is so low, it’s that it’s so . . . embarrassing! You feel — well, let’s face it — you feel a little like an idiot. After all, 3.5% isn’t even 3% after taxes. And with inflation running at whatever it’s running at, say 4%, you’re actually losing money!

Of course, it was no better a decade ago, in 1982, when banks were paying 12% but tax rates and inflation were higher. You could have been losing money back then too, but at least 12% seemed like a lot. And with the Dow groveling around 800, what was your alternative? Certainly not stocks — everybody knew stocks were no place for smart money.

Now, 10 years later, with the stock market nicely recovered — quadrupled, actually — it’s safe, finally, to take your money out of the bank and put it into the market or buy bonds.

Or that’s what everyone seems to be doing, anyway, and who am I to quarrel with multibillion-dollar monthly capital flows?

Yet quarrel I do. When friends call to ask which mutual fund to plunge into, I make the following speech: “It’s great that you’re thinking about stocks,” I say, “because, over the long run, stocks will outperform safer investments. And it’s great that you’ve decided to go the mutual-fund route, because that’s almost always wiser than picking the stocks yourself. (Do yourself a favor, though,” I remind them, “and choose a fund with low annual expenses and no sales fee.) But are you sure now is the time to jump in? Now, when stocks are more expensive than they have ever been in the history of the world?” (I allow myself a certain cosmic license here, for effect.) “Isn’t the concept to buy low?” I ask. “And to sell high?”

They get my drift, they thank me, they take one more look at that 3.5%, and they call their brokers to buy mutual funds.

And they could be right! Just because something’s overpriced doesn’t mean it won’t become more overpriced. Look what happened in Japan. But as often as not, things ultimately right themselves. (Look what’s happening in Japan.)

— If you already have money in the market, either through a long-standing program of periodic investments in mutual funds or through your retirement plan at work, bully for you. Keep it up. The habit is such a good one, I wouldn’t recommend breaking it, even though the market is overpriced. (If you’re anywhere near needing some of those funds, though, lighten up.)

— If you don’t have a long-term periodic-investment program and want to start one with a small nibble now, that’s fine too. It’s more important that you start than that you start at exactly the best time.

Otherwise, steer clear. My guess is that a lot of people, fleeing a safe 4% return, will find ways to lose 40%. (In the ’70s it wasn’t low interest rates but high tax rates that drove sensible people to do silly things. Desperate to avoid forking over 70% in taxes, they lost 100% in limited-partnership tax- shelter deals instead.)

This is not to say the economy is headed for trouble. The recession ended on Feb. 25 (the day I bought a brand-new Chrysler LeBaron convertible), and there’s reason to think business may boom in the year ahead (I have my eye on a new computer). But while that’s good news for Main Street, it’s almost surely already been discounted by the market. Could stocks have climbed so high without expectations the recession would end? And it also means interest rates may one day edge back up. Uh-oh.

So if things go nicely, stocks and bonds might well just sit here, or fall. And maybe things won’t go so nicely, in which case it’s hard to see stocks doing well.

And then there’s the matter of the election. Someone is going to win in November (you heard it here first), and that’s a problem. If it’s the Democrats, it could make Wall Street nervous. If it’s the Republicans, well, how much euphoria can there be, once the dust settles, over four more such years?

Personally, I’m bullish on America. For all our problems — which are considerable, to put it mildly — we’ve become leaner and meaner, and our quality has improved. Exports are up. Technology races along. And the flip side of the real estate collapse is the prospect of low rents — bad for landlords and lenders, good for business and consumers. Hopeful signs.

But don’t feel guilty or stupid leaving your money someplace safe and liquid for a while. You could have the last laugh.

P.S.: Pay down any high-interest debt you may have; not having to pay 11% on an auto loan is as good as earning 11%. And check into U.S. Savings Bonds. They have tax advantages and promise at least 6% if held five years. There are loads of decent, riskier possibilities; but remember: we’re talking about money you’ve had someplace totally safe. Be certain before moving it that you fully understand the risks.