It boiled down to this in the first half of 1998:
The two biggest ways you could have bettered your personal financial condition were to: Invest in stocks and bonds, or take advantage of plunging mortgage rates.
Gambling on the bull market is what paid off most. If you’d parked your money in bank savings or CD accounts, or gold, you would have barely beaten the rate of inflation.
But if you had pumped your cash into stocks and bonds at the beginning of the year, you’re miles ahead of folks who played it safe with Treasuries and bank CDs. At the current pace, Wall Street players this year will even eclipse last year’s sizzling performance.
Here’s how some of the major indicators performed in the first six months:
The most stunning was Standard & Poor’s 500 Index, up by 16.84 percent, meaning if you invested $10,000 back in January, you’d have $11,684 at the end of June.
Runner-up was the Lipper Growth Fund Index, ahead 15.57 percent for the six months alone, to $11,557 on the same 10 grand.
The Dow Jones average was up 13.2 percent, to $11,320 on your investment.
Trailing far behind was the Lehman Brothers Long Term Bond, gaining 6.27 percent to $10,627, which failed to match its last-year pace, and the government’s six-month Treasury bill, up only 5.13 percent to $10,513.
Even worse, six-month bank CDs paid a scant 4.9 percent for the first half of the year. But wait: Banks must advertise an annualized yield, so these accounts actually earned only half that–a measly 2.45 percent for the January-June period, making your 10K grow to only $10,245.
Gold, which was the biggest loser last year, nosed out bank CDs by rebounding 2.69 percent to $10,269.
To further build the case for stocks, consider that the Nasdaq average, which doubled in the past three years, gained an amazing 15 percent in the past month alone.
Bottom line: The news is relatively terrible for supercautious, conservative types who won’t invest in anything but accounts insured by the Federal Deposit Insurance Corp. or other supersafe instruments backed by Uncle Sam. Where investors once were tempted by 12 percent insured bank yields in the early 1980s, now they’re offered only 2 percent on passbooks to maybe 5.25 percent on a five-year CD. Considering the current rate of inflation, these people are merely running in place.
And the banks’ numbers have been slipping steadily since last summer. The return on short-term CDs has fallen by nearly two-tenths of a percent, while that on long-term accounts has plunged by about a half-percent. Americans who, in the 1990s, have stubbornly clung only to investments carrying an FDIC logo remind me of foolish people who refuse to buy real estate because they’re convinced the price has already gone as high as it can go. I remember two guys who, back in the ’50s, stood on an oceanfront lot for sale in the Florida Keys. One said to the other, “We’re not buying this land. They want $15,000 for it!”
The second place for you to have made money in the past six months, and make money now, is by taking advantage of extremely low mortgage rates. The rate on a typical 30-year fixed-rate loan has fallen by one-quarter of a percent since January, and it’s three-quarters of a percent below a year ago.
Compared with mid-1997, your total interest cost on a $100,000 mortgage has plunged by more than $18,000.
Besides the obvious opportunity to save a bundle through refinancing, many consumers are getting “cash-out” refinances. Say you still owe $50,000 on your original mortgage, but refinance for $100,000. You use the other 50 grand for a major home improvement or college education.
The downsides are that you’re deeper in debt, there are fees associated with the step, and it may take a couple of extra weeks for the loan to be processed. But getting your hands on money at 6.7 percent is a better way to manage your cash than forking out 18 percent to the credit card robber barons, or even paying 10 percent on a home equity loan. However, I don’t suggest taking the additional $50K and investing it with your broker, regardless of the Street’s spectacular gains. There is a thing called common sense in investing, no matter how high the yields.
– Credit tip. If your bank has merged with another bank, your credit card may change. Watch for any changes, such as bank name, annual percentage rate, fees. You may want to cancel the card.
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Robert K. Heady is the founding publisher of Bank Rate Monitor and is the co-author of the book “The Complete Idiot’s Guide to Managing Your Money.” You can write to him in care of this newspaper or send e-mail to jrnl8888@aol.com.
