A look at four years of a zero-rate policy
(MoneyWatch) In November 2008, the interest rate on one-month Treasury bills fell to less than 0.10 percent. Thus, we're now approaching four full years of the Federal Reserve's "zero interest rate" policy. The fact that the policy has been in place for so long has been a surprise to most economists and investors alike, especially for investors who have been sitting on cash waiting for rates to rise. Despite low interest rates and a plethora of other bad news, the markets have fared well since then.
The same month, the S&P 500 Index hit of low of 741. (It would hit its lowest point of the recession at 667 on March 6, 2009.) Let's take a look at some of the things that happened since then. Having perspective and knowing your financial history helps you become a better investor.
S&P 500 returnsIn 2009, the economy dipped into a recession, and we've had the slowest economic recovery in the post-war era. Despite the slow U.S. recovery, high unemployment, the European financial crisis and dramatic slowdowns in growth in the emerging market countries, the S&P 500 is now over 1,400 -- an increase from the March 2009 low, not even counting the return from dividends, of more than 100 percent. Unfortunately, many investors missed out on the rally as there was a flight of hundreds of billions of dollars out of equity mutual funds.
Bond yieldsIn November 2008, the 10-year Treasury yield fell to below 3 percent. Defying the predictions of most forecasters, the 10-year Treasury is now trading at around 1.65 percent, well below even the 2.30 level we saw as recently as April 2012. The closing low yield was 1.43 percent on July 25, 2012. And it's worth remembering that it was yielding as high as 3.75 percent on Feb. 8, 2011.
Recall that all this occurred despite the U.S. Treasury losing its precious AAA credit rating in August 2011. Here too, many investors missed not only the rally because they were sure rates couldn't go lower, but they have also been faced with the problem of how to reinvest the proceeds of their bond investments that have matured over the past four years.
It's been said that experience is the best teacher. However, that only works if you learn from your mistakes. If you've missed the stock and bond rallies of the past four years or failed to adhere to your investment plan because you panicked and sold, it's not too late to learn. Even smart people make mistakes. They just don't repeat the same ones. However, to learn from your mistakes you must first admit them -- something that's very hard for many, if not most, to do.
Image courtesy of Flickr user 401(K) 2012.
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1 He wants to reduce the amount of money going into Social Security by cutting the payroll tax. There would be some smoke and mirrors going on to make it look like there would still be the same amount of money going to the SS account, but that's all it is - smoke and mirrors.
2 Getting nothing (no interest) on our short term savings, CDs and money market accounts.
3 Seeing half a Trillion being removed from Medicare to pay for the uninsured (from cuts in payments to essentially every Medicare provider — hospitals, hospices, nurses, etc. - this will have to be made up elsewhere).
4 He wants to tax us more when we sell some stock or mutual funds that we bought years ago for our retirement.
5 The interest sensitive parts of pension funds are taking huge hits because of the low long term interest rates being introduced.
Obama and the Democrats have declared war on responsible seniors so they can continue to give handouts to the welfare crowd.