Ch-ch-ch-ch-Changes in interest rates from 1991-2011

Ch-ch-ch-ch-Changes
(Turn and face the strain)
Ch-ch-Changes
Don’t want to be a richer man
Ch-ch-ch-ch-Changes
(Turn and face the strain)
Ch-ch-Changes
Just gonna have to be a different man

“Changes” is a song by David Bowie, originally released on the album Hunky Dory in December 1971 and as a single in January 1972. Despite missing the Top 40, “Changes” became one of Bowie’s best-known songs. The lyrics are often seen as a manifesto for his chameleonic personality, the frequent change of the world today, and frequent reinventions of his musical style throughout the 1970s.The song is ranked at number 127 on Rolling Stone magazine’s 2004 list of the 500 Greatest Songs of All Time.

The song is also an interesting parallel for changes in interest rates over the past two decades.  Students of investment market history know that most interest rates peaked in 1981 and have been on a downward trend ever since with a few bumps upward along the way – sort of like riding your bicycle downhill and hitting the occasional speed bump.  This has been the greatest time ever to own long term bonds, but what is the significance of this trend today for the average investor?  Low interest rates indicate that it is inexpensive to borrow money so it may seem good for debtors, but what about people who have tried to live on the interest earned by their money?  What about those who saved up their money and chose to lend their money to others in return for a stream of interest income?  Consider the picture below, used by Franklin Templeton Investments in a recent article to educate investors.

Ch-ch-ch-ch-Changes indeed!  In 1991 your could earn almost 10% interest so if you had $150,000 invested you could buy a new car each year with it.  These days, with interest rates about 1% you only have enough to buy a good set of performance tires.  Another way to look at it is that the interest you earn is not enough to pay the HST on a basic new car.

Just gonna have to be a different man and invest in a different way to make things work these days.  Let me know if you’d like to discuss the impact of interest rates on investment asset allocation and what it means for retirement income security.