CDs - Investing in Reverse

Investors in certificates of deposit (CD) continue to lose ground. Market Rates Insight reports that the interest investors earn on the highest paying CDs is now lower than the rate of inflation.

The rate on 5 year, callable CDs hit 2.4% in April, while the annual inflation rate ticked up to 3.16%. The result is a negative yield of 0.76%.

This drop in the real rate of return for CDs is not surprising. Shorter term CDs have carried negative inflation adjusted yields since late 2009.

CDs are often held by older and very conservative investors. They are perceived to be less risky than market-based investments.

It is true that there is little, if any, risk that investors in CDs will not receive their money back at the maturity of the CD. However, CDs do carry risk. The risk is that the investor will not be able to maintain purchasing power in the face of rising inflation.

Intelligent investors realize that risk comes in many forms. They also understand that there is no truly risk-free investment.

The Mystery of Hedge Funds

The Wall Street Journal ran article on the front page a few weeks ago about how investors our pouring money into hedge funds. The Journal reported that hedge funds are managing nearly $2 trillion and are approaching the high point they reached in early 2008 before the economic crisis.

The recovery of the hedge fund industry is baffling. This industry claims to provide investors with returns that are better than those that can be achieved though such pedestrian vehicles as mutual funds. Hedge funds market themselves as sophisticated, exclusive, and elitist. They cater to the affluent investor who must meet the accredited investor standard. (According to the Securities and Exchange Commission, these investors must have an income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. Alternatively, the investor must have a net worth that exceeds $1 million.)

Apparently many accredited investors are not particularly intelligent investors. If they were, they would realize that hedge funds have generally failed to live up to their claims. In 2008, hedge funds suffered their worst year on record with the average fund losing 19% according to Hedge Fund Research Inc.

As a result of losses and withdrawals the hedge fund industry shrank by a quarter. But the industry has rebounded and attracted $55.5 billion in net new money in 2010.

Now the average hedge fund earned 20% in 2009 and 10.3% in 2010. The Standard & Poor's 500 index increased 26.5% and 15.1% in those same periods. In the first quarter of this year, the average hedge fund rose 1.6% in the first quarter of this year compared to 5.4% for the S&P 500 index.

One has to wonder about investors who pour billions in to vehicles that routinely underperform the market. It's even more perplexing to consider that most of these hedge funds use strategies that carry risk that is far greater than the risk of the market itself. So, investors take on more risk than the market and are rewarded with lower returns than the market.

It does not end there. Hedge funds typically charge their investors a 2% management fee and they take 20% of the profits. I don't know how Hedge Fund Research reports their data. It could be before or after fees. If it's before fees, then hedge funds are even less appealing.

Intelligent investors don't accept the hype surrounding hedge funds. They are smart enough to ask serious questions before investing in anything, including hedge funds. Questions like:
How much risk is involved in this investment?
What is your performance benchmark?
How have you performed against that benchmark?
What fees will I be paying?



Sources: The Wall Street Journal, Hedge Fund Research

Got a POLST?

Imagine you are involved in a serious accident. You are brought to the hospital and placed in intensive care. The ER docs are not sure you're going to make it.

You are unable to communicate. What do you want to happen? Are the docs supposed to take every measure to keep you alive? Are they supposed to make you comfortable and let nature takes it course?

Are your intentions written down? If so, where is that document? Who has copies?

According to the University of California, San Francisco, three quarters of us will be unable to make some or all of the decisions at the end of our lives. As a result, inappropriate care may be given and family members may be placed in very difficult emotional situations.

You can prevent this from happening by implementing a Physician Order for Life-Sustaining Treatment, or POLST. This document, which you and your personal physician sign, specifies the kind of care you would like to receive.

Oregon is one of 14 states that have a POLST program. The POLST is an official medical record that is stored in a state registry. You complete this document with your physician.

If you are interested in learning more about POLST, you can visit this page at the Oregon Health Science University (OHSU) web site, http://www.ohsu.edu/polst/.

Consider bringing the subject up with your doctor, the next time you're in for a visit.