Vanguard‘s recent piece discusses the thumping that savers are getting at the hands of the Fed, otherwise known as financial repression:
…today’s near-zero interest rates are no laughing matter for many American savers—not just my kids. They are my parents, my friend saving for a down payment on a home, and my retired neighbors down the street. You may be one of the many Americans trying to live off of your well-earned savings, whether those funds are in money market or checking accounts. In my mind, savers—as opposed to investors—are the proverbial “sacrificial lambs” of monetary policy.
The Federal Reserve has held its interest rate target between 0% and 0.25% since late 2008. Adjusted for inflation, the yield on 3-month Treasury bills is actually negative, as illustrated in the chart below. Quite frankly, yields on such savings vehicles are likely to remain that way for some time, with the Fed expected to keep its target rate near 0% at least for another year—and possibly longer.
Since December 2007, personal interest income has declined by close to $100 billion. The modest economic growth the nation has experienced since 2008 has come, to some extent, at the price of a negative real rate of return for savers.
Vanguard includes a nice chart of real rates as well. You can see that the green line—the real rate of return—is below zero.
(click to enlarge) Source: Vanguard
Most savers probably do not remember volunteering to be the sacrificial lambs of monetary policy, as Vanguard terms it. As an investor, you do not have to allow yourself to be shanghaied into a bad situation. If you want to sit still and be sheared, fine. But you have a choice in the matter, a choice to do something that might better your situation.
If the old axiom “money goes where it is treated best” is at all true, then tactical asset allocation driven by relative strength should be an efficient way to take advantage of that fact. Relative strength does nothing but push the portfolio holdings toward those areas that are rewarding investors with good returns. If the returns start to lag, the position is replaced with something more promising. There’s going to be more volatility involved, but you might have a chance to stay away from the shears.
[...] we pointed out in our 2011 blog post, “The Silence of the Lambs,” savers are taking a thumping at the hands of the Central Banks: …today’s near-zero [...]