Can Low Interest Rates Hurt?

By
December 09, 2020

The Downside of Low Interest Rates and Investment Opportunities

Can low-interest rates hurt? Maybe. 


Back in August, the Federal Reserve Committee met and reaffirmed their monetary policy. The Fed is committed to keeping long-term interest rates low.


Today, long-term interest rates are near zero. They cannot go much lower. The Fed has made it clear that interest rates will stay this way until at least 2023.

Even then, they don't want to see rates increase. This is a serious problem for both savers and those invested in a 401(k), 403(b), IRAs, pension funds, or just about any other retirement program. Why is this? Lower rates mean lower investment returns and this will result in under-funding those retirement programs.


Worse yet, those lower returns could be less than the inflation rate, making investor buying power decrease over time. No one wants inflation to be greater than their investment returns. An obvious solution for some is to invest in timberland.  The growth represents 75% of the investment drivers (timber prices are maybe 10%), so this is where resources should be focused. Properly managed timber should be growing at 10% to 15% at a minimum. Even a 10% growth is much better than the 1% that your bonds are paying. 


Fortunately, growth accumulates tax-free until you harvest. Even then, timber sales are taxed at the preferred capital gains rate, not at ordinary income tax rates.


Winter is upon us, which is when foresters and landowners focus on tree growth. Once every two to three years, landowners should schedule a foliar and soil sample in order to determine their baseline tree nutrition needs.


The resulting laboratory analysis will show how the trees are growing and what deficiencies, if any, are present. Testing is fundamental to maximize tree growth as the deficiency of one single nutrient will limit growth. Trees need all of their required nutrients to be available and not some of them. This simple process will ensure that growth is optimal. If a deficiency does exist, then the foliar analysis will be used to formulate the correct forest fertilization mix. There is no reason to pay for a nutrient if it is not needed.


Another advantage of long-term interest rates is buying and financing timberland. Now is the time to buy. If one can buy timberland and finance it at 4%, and if the timber is growing at 12%, then one could make 8%. It is also important to note that interest expenses are normally tax-deductible, making the financing even cheaper.