Don’t Let Inflation and a Volatile Market Get You Down

When the market changes unpredictably, values of investments rise or fall dramatically and are moving up or down more than normal, the market is said to be volatile. The underlying reasons for the volatility can be complex and sometimes even seasoned investors consult a financial advisor to help them map out a plan. In general, during a volatile market, many investors cope with the changing dynamics by: 

• reviewing their asset allocation and risk tolerance
• rebalancing their portfolios
• revisiting their investing strategies

If you’re looking for some relatively low-risk choices to add to your portfolio, consider some of these options.

Savings Accounts

Traditional Savings Accounts

Traditional savings accounts allow you to put money aside for the future and earn interest. The money is always available for withdrawal, without paying a penalty. Although these accounts won’t earn as much as other investments, they’re a safe place to let your money grow. Plus, they aren’t connected to market ups and downs. Your balance only reduces if you take money out. And, your deposits are insured by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration) up to $250,000.

In general, you’ll probably do better with an account at a credit union because they often pay higher interest rates on deposits than banks. 

Money Market Accounts

Money market accounts are a type of savings account designed to help you accumulate money at a higher rate of interest than regular savings accounts. They’re great for helping you save for things like a big purchase or an emergency fund. These accounts typically have a required minimum balance. At Navy Federal, you can earn dividends with a minimum balance of $2,500. 

What sets money market accounts apart is their checking account-type features—like check writing and debit cards. Investors like their flexibility and easy access to funds. Two other attractive features are the option to reinvest dividends to buy more shares in the fund and the fact that they’re also insured by the FDIC or NCUA.

When considering money market accounts, it’s important to understand their rates, requirements, limits and fees. If funds drop below the required minimum, rates can be lower than other types of savings accounts. Plus, some financial institutions limit the number of monthly withdrawals/transfers (usually 6), and some may charge fees. So, it’s a good idea to understand the rules.

Certificates

Certificates (also known as “Certificates of Deposit,” “share certificates” or “CDs”) are some of the lowest-risk investments available. They’re actually another type of savings account. The difference is, you agree to deposit your money for a specific amount of time, and in return, you earn a higher interest rate than you would with a regular savings account. Financial institutions offer terms from 3 months all the way up to 7 or even 10 years. In general, the longer the term, the higher your rate will be. And, although you probably won’t earn as much as you might with certain stocks or other types of investments, certificate returns are guaranteed. Best of all, these accounts are insured up to $250,000 by the FDIC or NCUA.

Certificates have minimum deposit requirements, and many will also allow you to continue adding money. It’s important to know that if you withdraw funds before your certificate matures (your term ends), you could pay an early withdrawal penalty.

Annuities

Annuities are insurance products some investors purchase to have a stream of income after retirement. They may be for a specific number of years or based on a single or joint life expectancy. Here are highlights for 3 types of annuities: fixed, variable and indexed.

• Fixed annuities can offer you a stable and reliable income. They have a guaranteed minimum interest rate on your contributions, and the insurance company assumes any risk.
• Variable annuities are more tied to market variations than fixed annuities. They allow you to invest in many different asset classes, which increases the diversification of your portfolio. Monthly payments may fluctuate, depending on how the investments perform, but many companies will allow you to purchase additional riders and features to lower the risk.
• Index annuities pay you returns based on how certain market indexes (e.g., S&P 500) perform. They have some characteristics similar to both fixed and variable annuities: a minimum guaranteed interest rate or a rate linked to a market index. So, you could earn higher returns than fixed annuities when the market is performing well and have less risk than variable annuities when it doesn't.

It should be noted that annuities are not liquid assets, may have withdrawal penalties and can have complicated tax issues. Since there are also a number of different products available, it’s important to get financial advice to help you understand their various features so you can decide on which type to choose. A Navy Federal financial advisor can help you decide if annuities are right for you.^{Footnote 1}

U.S. Department of the Treasury Investments

The U.S. Department of the Treasury issues a number of interest-bearing investments. Bills, notes and bonds allow the government to raise money by borrowing from investors and paying them a fixed (set) interest rate. They vary by type and the number of years until they mature. 

Maturity Timeframes

• Treasury Bills: issued for 52 weeks or fewer
• Treasury Notes: issued for 2, 3, 5, 7 and 10 years
• Treasury Bonds: issued for 20 or 30 years 

Investments that mature many years in the future may not keep up with inflation, which may reduce your buying power. Two types of Treasury investments that some investors consider a hedge against inflation are Treasury Inflation-Protected Securities (TIPS) and I Bonds.

• Treasury Inflation-Protected Securities (TIPS). These are U.S. Treasury-issued bonds. Like other bonds, TIPS pay you interest and return your principal at maturity. What sets TIPS apart is that their value is adjusted based on inflation and deflation. Since the government adjusts for both, it’s possible (but rare) that deflation could reduce your principal. Held to maturity, they’re redeemed at full value. They’re issued with maturities of 5, 10 and 30 years. According to the U.S. Department of the Treasury, they can be sold prior to maturity in the secondary market at market rates. TIPS will allow you to buy up to $5M through TreasuryDirect.
• I Bonds. These are another type of bond that offers inflation protection. They’re considered safe and reliable, long-term investments, because their interest rates are regularly adjusted for inflation (not deflation). They’re issued for 30 years, but you can redeem them after 12 months (with a 3-month interest penalty). After 5 years, there’s no penalty. There’s a cap on how much you can buy (10K maximum per person in a calendar year/an additional $5K if you use a tax refund to make the purchase).