3 Alternatives to Investing in a Low Interest Rate Environment

There was a time not too long ago when an investor could find a certificate of deposit (CD) that would yield 3%, 4%, or even 5% in some cases. When the economy was strong and interest rates were high, there was little effort required to find a CD paying a modest yield. Now, when interest rates are at historic lows, these once high yield investments have turned into nothing more than fancy saving accounts offering yields around 1%.

Photo by Alan Cleaver via Flickr

Right now, investors are finding that the low interest rates make it difficult to put their money to work. When interest rates are low, it is time to look elsewhere to invest.

Three Alternative Investments

1. Invest in Dividend Paying Stocks

Investing in the stock market does carry some risk as there is no guaranteed return like a FDIC backed CD. However, there are strategies that can be used to minimize possible risks, such as investing only in stocks found on the list of dividend aristocrats. These are companies that have been consistently raising dividend payments annually for at least 25 consecutive years.

A properly built stock portfolio can return 3% to 5% in the first year, just in dividends. Factor in annual dividend increases and compounding interest and your returns can skyrocket each year after. Finally, dividend stocks can also provide capital gains in the event they are sold making them a low risk investment option.

2. Peer Lending

While relatively new to the scene, peer lending can offer returns that are too high to ignore. For example, according to Lending Club, investors have averaged over a 9% return historically. It is important to note that peer loans (aka micro loans) are not FDIC insured, so there is an added risk. If a borrower defaults on the loan, for example, there is a chance you could lose your entire investment.

One way to minimize possible risks with peer lending is to diversify your investments across several loans in smaller amounts. For example, instead of investing $1,000 in one loan, invest $25 into 40 different loans. This is just like diversifying your stock portfolio.

3. Real Estate Investing

A low interest rate environment is great for anyone looking to borrow money. If you can get approved for a home loan, it is a great time to purchase a house, refinance your mortgage, or buy a rental property. There are multiple reasons why real estate is particularly attractive right now:

  • Real estate value has not recovered from its peak and are still undervalued in some areas
  • Mortgage interest rates are at an all time low
  • Both your home loan and your physical property act as inflation hedge (and higher inflation is a likely future for our economy)

Final Thoughts

Unfortunately, this is not a great time to invest your money in secure investments. If you are tired of earning 1% (or less) on your money, consider alternative investment options that can help increase your return. Putting your money to work in dividend paying stocks can provide steady income generation along with capital gains. Peer lending offers much higher returns than traditional investment that comes with additional risks. Finally, real estate investing, whether that means buying your primary residence or a rental property, could be a good opportunity that offer higher returns.

What alternative investment options can you suggest to help grow your money?

About the Author

By , on Sep 26, 2012
John Schroeder
John Schroeder is a personal finance blogger who enjoys writing about passive income, debt-free living, and financial independence. He also enjoys sharing his experiences in raising a family on a single income, while his wife stays home with their two children. Aside from writing about money, he is an avid runner and enjoys spending time outdoors with his kids.

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Leave Your Comment (5 Comments)

  1. Tony says:

    Trade stocks! I think the only way to really “win” in this environment is to fit into the environment by trading this secular bear market.

  2. Jamie says:

    I want to start investing in P2P loans the more I hear about it. I worry that giving a loan to an anonymous person over the internet may be a lot riskier than other types of short term investments, though. For now I just invest more in my retirement account.

  3. David says:

    Strategies vary among investors and one of the indicators is the investors’ appetite for risk. Peer lending is a great option for those who wishes to minimize risk. Going into real estate currently does sound extremely enticing and it is an opportunity that is too good to ignore.

  4. Greg says:

    Peer-to-peer lending seems to be a lucrative way to invest money now and do something good for the overall economy. Often people want money to expand their businesses and the returns for lenders seem to be decent. I am thinking about taking a chance on this.

  5. Jenna says:

    I’m hoping to get into the real estate market more now that I’ve bought my first home. Maybe peer lending.

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