Ask HN: How to prosper under negative interest rates?

You have to look at real rates, not nominal rates. The only markets that have negative nominal rates are battling deflation (which the US is not) or have serious liquidity concerns at the moment. The Fed is unlikely to go negative as they face a very different beast.<p>Here&#x27;s a quick example. Let&#x27;s say you&#x27;re in a deflationary environment: in 1 year, your money actually buys you <i>more</i> than it did last year, let&#x27;s say for instance, 2% more. Under this weird environment, you would actually be willing to pay someone to hold your money for a year, because you know in a years time, it will buy you 2% more (effectively a 2% return). So, since you don&#x27;t want to store that money under your mattress, how much will you pay someone? Let&#x27;s say you pay your bank 0.5% for holding your money (i.e. negative rate). So in a years time, you get 99.5% of your money back from the bank, but it buys you 2% more &quot;stuff&quot; so really, compared to today, you&#x27;re getting 101.5% (roughly) of your money back, which is the same as a 1.5% interest rate. This is called the &quot;real&quot; interest rate, and it&#x27;s the only one that matters.

So the time value of money is more or less zero now and loan rates depend much more on default risk than any opportunity cost in loaning the money. To an economist, the implications of that might be big, but to a regular person, it&#x27;s really a small shift in possibilities.<p>A savings account at 0% doesn&#x27;t build wealth, but it didn&#x27;t really do that 3 months ago at 1.5%. Personal loans at 9% aren&#x27;t much better than loans at 11%.<p>If you&#x27;re not planning on making a career out of doing something finance-related, I&#x27;d say there isn&#x27;t much to do differently.<p>My one recommendation would be to hedge a little against the possibility of asset bubbles. I&#x27;m not saying bet on them (I don&#x27;t know if they&#x27;ll happen, nor can I predict the future and time them). Rather, I&#x27;m saying try not to be in a bad spot if they happen, because easy money definitely increases the chance we could see one. As an example, everyone in this life needs a roof over their head, so if you don&#x27;t own anything real estate related, a bubble in real estate prices is a risk. A homeowner who plans to stay in their house 20 more years doesn&#x27;t have to care about annual changes in the real estate market...but a renter does. So own your home if it makes sense for your situation, or consider having money in REITs, or own a rental property. Don&#x27;t over-extend yourself, but try to avoid needing a tulip and not having one in 1636.<p>Likewise, if you are relying on investments to retire, and are many years away from doing so, make sure a significant portion is in boring sp500&#x2F;total stock market etfs. If your time horizon is long enough, not being able to buy stocks at a decent price is a bigger threat to your retirement than a short term drop, so make sure you have some amount of money in the market while the market isn&#x27;t at all time highs.<p>As always, it depends on your situation and I&#x27;m not qualified to tell you what to do with your finances.

In all markets, and generally as a life strategy, there is a &quot;winner&quot; method and a &quot;survivor&quot; method.<p>If you play to win, you are most likely following accepted best practices to maximize gains - in your career, socially, economically, and so on. You optimize to &quot;cut the fat&quot; regularly, stay with the trends and try to be the front-runner in everything. In this market, playing only as a winner amounts to taking on huge amounts of risk, because there&#x27;s high volatility and little accepted wisdom or trends to follow. Any move that uses leverage could be the one that makes you wash out - and in the same way, being gregariously social to keep up appearances during a pandemic may kill you.<p>The &quot;survivor&quot; method is what it sounds like: playing to not lose. They are not just aiming for low numeric risk factors, though; the point is to have second, third etc. lines of defenses against black swans. Survivors will tend to look for overlooked niches and early diversification. They amass unlikely hoards while keeping their heads down, which leaves them isolated a lot of the time.<p>In general the optimal position for every market is where winner strategies intersect with survivor strategies: Find something that is relatively stable that nobody is talking about and move your money closer to it. Then when the business cycle picks up your portfolio magically turns into something positioned to capitalize.<p>Of course, the essential problem is that if nobody is talking about it, how are you going to discover it? If you wait until it hits the news, that&#x27;s probably too late.<p>But business formation or repurposing presents another option. Down cycles are opportunities to start the next trend yourself, because the air is clear and you don&#x27;t have heavy competition. When a market is competitive, everyone spends on sales and marketing to be the loudest voice. When it&#x27;s quiet, &quot;build it and they will come&quot; becomes a great deal more plausible and you can really focus on product.

You don&#x27;t build wealth by saving. You do it by investing using leverage. The system subsidises debt and risk-taking (within limits) by inflation and the structure of the tax system. You need to let go of the idea that it is immoral.<p>Buy a house and when you can buy a bigger house. Put your money in the growth part of the stock market (technology ... big names like Apple and Amazon is good).<p>Use your income to take on more debt; do not save cash as it will be taken from your via inflation, tax or now negative interest.

&gt;&gt; I was brought up to work diligently, not take on debt, and save<p>It absolutely will put you at a huge disadvantage, through no fault of your own. The whole point is to transfer money from savers to debtors.<p>And, there&#x27;s no getting away from it, unless you take on large risks. The govt is pushing for more and more inflation. We&#x27;ve already had high inflation for the last couple of years of over 2%, and they&#x27;re still pushing for more inflation. The only way to protect your money is to get into real assets like real estate and equities. Yes, that entails a lot of risk.

&gt; I was brought up to work diligently, not take on debt, and save - a simple approach to building wealth<p>This basically doesn&#x27;t build wealth, it builds a pile of money which you can draw down in the future. Not nothing and good to have at the base of a pension, but once you&#x27;ve gone beyond the basics it doesn&#x27;t do much. It&#x27;s mere deferred consumption, it&#x27;s not <i>making</i> anything.<p>Now you have to face three problems:<p>- there are people out there with many orders of magnitude more money than you. They don&#x27;t know what to do with it either. This is why rates are so low.<p>- the risk&#x2F;reward tradeoff is real. Real estate and equities are popular but both can fall off a cliff suddenly. To successfully invest in either you need to be able to wait out the bad years without cashflow problems.<p>- we&#x27;re in a period of massive uncertainty. It&#x27;s a pretty bad time to start a business .. unless you have a clever plan for the pandemic.<p>If you can buy distressed property or businesses at the &quot;end&quot; of the pandemic, and the pandemic ends and the economy returns to the old normal, you could do very well. If.

Disclaimer: There are plenty of people who know more than I do about economics... There are also plenty of people who know significantly less.<p>My understanding is that situations like this are solved by printing money. (Yup, good ol&#x27; inflation.) We (the US) will probably have to; the value of the dollar is skyrocketing compared to other currencies, which makes it hard for us (the US) to conduct business internationally.<p>What does this mean? Now is a great time to take on debt, or to shift debts to pay off debts more slowly. (For example, pay off your car loan with a home equity line of credit.) Why? In periods of high inflation, the real value of your loan&#x27;s monthly payment goes down very quickly.<p>Why do I think we&#x27;re going to have high inflation? A lesson from the depression is that forcing people to pay their debts during deflation kills an economy: Wages go down, so a higher percentage of a paycheck goes to debts, which then cuts demand for services, which further lowers wages.

My opinion: Creating value is still worthwhile - no matter what is going on with the currency, it&#x27;s still used for exchange. So if you&#x27;re creating value you&#x27;ll be fine. A friendly reminder: value is determined by the customer.<p>For myself, I am betting that tangible assets that provide value would be preferable to assets that just sit there. Value investing and prudent real-estate are where I&#x27;ll be concentrating my efforts if I have spare money.

I&#x27;m not a financial planner or financial services professional of any kind, so take anything I say with a grain of salt.<p>1) should I stop saving?<p>No. negative interest rates won&#x27;t go <i>that</i> negative. Even if your bank is earning -1% interest, it still makes sense to be saving.<p>2) Should I put my savings elsewhere?<p>Probably. ETFs or index funds with wide stock market exposure are a good idea (good examples are SPY, VOO, VO, VFINX... and many others). You make money by buying stocks when the market is low and selling when the market is high. Long term, it will <i>probably</i> go up as it always has. That said, it&#x27;s very hard to time the market, so the best strategy is to put your money in over time. One good way to do this is to take a set amount of money from each paycheck and invest it every pay period, regardless of what the market is at. If you have a bunch of money sitting in savings right now, maybe divide it into 52 parts (or 104 or 156 or even 208 depending on your risk tolerance and&#x2F;or thoughts on how long this market decline will last) and invest that amount each week.<p>3) Should I take out loans to buy up assets?<p>Probably not. No one is gonna give you an unsecured loan at a good enough rate that will make this worthwhile. And a secured loan will be against something like a house, which you probably don&#x27;t want to risk losing. This is almost never a good idea.<p>One big exception might be buying a home. When the dust settles, the real estate market might take a big hit in which case taking out a loan (i.e. a mortgage) to buy a home might be a good idea.<p>4) Should I build businesses and raise venture capital for them?<p>Depends on the business. Venture capital money is going to tighten up a lot. People just aren&#x27;t going to be throwing around money during a recession in the way that they did 6 months ago. But if you can stomach it, this is probably as good a time as ever to build a business that can get to profitability quickly. The only caveat is that it might be a risky time to quit a job with a stable income. Typically, it&#x27;s easy to take for granted that if your business fails you can just get a job. Right now, that seems less certain.

A negative interest rate is a penalty for not putting liquid capital to productive investment, regardless of wether such opportunities are at hand. To some extent, so is inflation.<p>Negative rates don’t mean alternatives become better investment strategies. It just moves goal posts to encourage more risk taking in the economy.<p>Housing looks like the best alternative investment strategy. There are funds that focus on solid rental markets, owning their housing complexes for example.

CTRL+F and nobody mentioned Austrian Economics, the Mises Institute, gold, bitcoin, sound&#x2F;hard money... wow. People are really delusional and still completely under the thumb of Keynes&#x27; wrong economic &quot;policies&quot;.<p>Wake up people. Coronavirus or not, the world has been in a state of decay since after WWI and it snowballed in the 70&#x27;s when the last of the gold standard was severed.<p>People advising that 2&#x2F;3 % inflation is &quot;not only not bad, but a sign that the economy is doing great&quot; have absolutely no idea what they are talking about.<p>For those who are a minimum curious, I really advise you to read two fenomenal books<p>- What has government done to our money? - Rothbard, Murray N.<p>- Democracy: The God that failed - Hans-Hermann Hoppe<p>To the OP: government&#x27;s great plan is to eliminate cash or render cash useless. Everything will more to digital cash where they can effectively do negative interest rates. What can you do to protect yourself? Put most of your money in Bitcoin and Gold. These are the only hard money in existence.

Prospering and risk-aversion don&#x27;t go well together. At best, diligent work will get you ordinary prosperity of a system which generally rises over time. Diligent work is not as rare as people often imagine, and diligent workers fare averagely well. Unfortunately, the variance from that average seems increasingly precarious, as a few do exceptionally well and many slip below it.<p>Doing better than average comes with risk. If you&#x27;re even asking this question, you can afford risk. Few would even think to &quot;build [multiple] businesses&quot;, much less start with the assumption of access to venture capital.<p>So if you want risk aversion, you can do the same thing you&#x27;ve always done: put your money in a broad index fund and trust that the markets will recover well before you retire. The fact that they&#x27;ve always done so eventually is not proof that they will this time, but nobody can give you advice for the black swan event of markets failing perfectly. In that case you&#x27;ll have worse things to worry about than your 401k.<p>If you want to take a risk from the Fed giving out free money... well, those negative interest rates aren&#x27;t available to consumers. For example, mortgage rates are actually going up because so many see this as a signal to refinance. That money is mostly going to the bond market, because it&#x27;s the last line of defense for the government. From there it goes to the stock market, where it&#x27;s going to sustain an unsustainable boom. (Despite what I said earlier, the market as a whole is almost certainly overpriced, and even the earlier fall didn&#x27;t fully correct it.)<p>Basically, the Fed free money isn&#x27;t for you. It&#x27;s about the government and a few financial firms, and your 401k&#x27;s tiny piece of that. All you can do is muddle along the same way you always did. Go ahead and start a business or buy somebody else&#x27;s, if you&#x27;ve got the free cash -- and it sounds like you do. You&#x27;ll probably lose it, because most fail. But that&#x27;s how one does better than average.

It&#x27;s blowing my mind that I just did a ctrl-F for &quot;compound interest&quot; in this thread and got zero hits. It&#x27;s not even part of the discussion any more.

Lot of concepts here.<p>1) 0% may feel like a threshold, but it&#x27;s not that quantitatively different from the sub 2% interest rate environment we&#x27;ve been living in for many years from a wealth generation standpoint.<p>2) Should you stop saving? If you mean should you be generating more cash that you spend, the answer is that&#x27;s probably a good idea unless you have a pressing cash need now. If by saving you mean putting your money in a Savings Account, then yeah there are probably better uses of your capital since most pay effectively 0% interest.<p>3) So where should you put it? This depends a lot on your tolerance for risk, and your forecast for how quickly you might need the cash. If you need it soon and&#x2F;or have a low appetite for risk, then go for safer, less volatile assets like treasuries or CDs. If you have a bit of time and risk tolerance, stocks have pulled back considerably so buying in at depressed prices and waiting for the recovery might be a good idea. Real estate is probably similar depending on where you live. If you really want to swing for the fences, go ahead and start a business, although ultimately there are a million factors that will determine your success before the interest rate environment will.<p>4) Should you take out debt to buy even more assets than you could with my own cash? Maybe, this all depends on your risk tolerance. If your investment decisions are good, you will reap even more returns. But if they are are bad, you will have to pay back the debt after incurring losses. So it just pushes your outcomes towards the extremes. You probably should not do this solely because interest rates are low.<p>A final note-- your approach to wealth generation shouldn&#x27;t change based on interest rates. I think your upbringing is mostly correct, if you work diligently and spend less than you make, you will be on a road to building wealth.<p>The question is what to invest your free cash flow in, and the answer is almost always: all of these options. Diversifying is the best way to minimize unsystemic investment risk.<p>The question is then: how do you allocate your capital between risky and safe assets? That depends on the interest rates, your near to medium term cash requirements, your risk tolerance, and your age. That said, a rule of thumb is to do (100 - age)% in riskier investments, and your age% in safer investments.

Maybe donate to charity to help people who have lost a lot more than their investment returns...

&gt; Should I put my savings elsewhere?<p>Sure. Consider donating to a food bank, or an effort to provide medical equipment, or some other charity you care about.

If you live in the US you could buy Series I Savings Bonds from the government. They have a fixed rate which is set when you buy them (currently very low) but they also return an additional rate that varies over time based on inflation. (There are also mutual funds out there like e.g. the Vanguard Inflation Protected Securities fund that are supposed to guard against inflation too.)<p>In the long term, I would assume these will not give you anywhere near as good returns as other higher-risk investment options, but they might work for you depending on what you&#x27;re looking for.

for a science fiction take: the economy is in negative inflation in Frederik Pohl’s _The Other End of Time_. There is a scene where some astronauts are on their way home from a day of preparation, and as part of their routine convert their paychecks into cash and browse various sidewalk tables full of collectibles and antiques on the way home, converting their cash into miscellaneous items that would cling to or appreciate in value.<p>this book was pre-web, and the scene a very minor scene of one relevance to the larger plot, but I still think about it a lot

There&#x27;s a whole spectrum of risk from buying U.S. Treasurys to trading on margin. You don&#x27;t have to go to either extreme. And you can buy multiple things and come up with a portfolio that has the right risk profile for your risk appetite and this current environment.<p>Once the dust settles, you can invest in all sorts of safe-ish type vehicles that aren&#x27;t Treasurys and still clip a coupon. High-dividend stocks such as utilities are one example, but a financial advisor can help you pick the right investment for your portfolio.

Remember that regardless of positive or negative, it&#x27;s only a fraction of a percentage and not likely to last very long. A transient -0.0025 is very different from a long term -2.5

&gt; I was brought up to work diligently, not take on debt, and save - a simple approach to building wealth<p>This is a lie told to the lower class to have them work like slaves. That&#x27;s not how wealth is generated anywhere on earth. Wealth is created by &quot;luck&quot; ( finding oil, discoveries, stealing&#x2F;confiscating, etc ) or using capital ( inherit it, borrow it, steal it, whatever ) to hire others to generate value and give those &quot;others&quot; as small a piece of the generated value as possible ( without the others turning on you ) and keeping the rest for yourself ( aka wealth ).<p>Imagine you and your 3 brothers make 10 pizza pies. If you can get them to take 1 pie each and you keep 7 pies, you just generated wealth. Congratulations.<p>&gt; but I&#x27;m concerned that will put me at a disadvantage under an economic system with negative rates.<p>If you have to ask &quot;How to prosper under negative interest rates?&quot;, then you are already disadvantaged and nothing is likely to change that. Negative interest rates, positive interest rates, it really doesn&#x27;t matter for the average joe. Why not just live your life instead of worrying about things outside of your control? Ultimately, it all balances out. Sure, your savings account might not pay decent interest, but your mortgage or student loan interests will be lower.

Somewhat of a tangent but negative interest rates are associated with currency deflation.<p>Does anyone know of any prominent economists who argue that deflation may be a good thing? I know the overwhelming consensus is that you want something like 2% or 3% inflation to ensure market growth but I&#x27;m always interested in alternative perspectives, particularly because personally I&#x27;m not convinced that you necessarily want (or need) perpetual growth.

Here&#x27;s what I&#x27;m looking at...<p>Since interest rates will be low, it could be a good buying opportunity for investment property. There is always risk here and with a rent strike looming there is potential for even more. I was already in the market for investment property so I&#x27;ve been following various markets (zillow lets you export a ton of data about historic property values and projections). Prices haven&#x27;t fallen yet, but back in 2008 there were a number of years where it was a buyer&#x27;s market. The stimulus bill that just passed also drops the limit on real estate depreciation, which is a potentially massive windfall for real estate investors.<p>Not that it takes advantage of negative interest rates, but stocks are &quot;on sale&quot; right now and with today being the last day of Q1 and the viral apex on the horizon, more bad news is likely on the way... so there might be an even better opportunity to buy some previously top performing stocks in the coming months. I made about 60% between October and February and plan to buy back in soon with much better positions.<p>I&#x27;m very interested to hear what others are thinking about doing or if they have feedback about what I&#x27;m thinking.

&gt; I was brought up to work diligently, not take on debt, and save<p>Just keep doing that. Let&#x27;s talk a worst case. Say coronavirus lasts 18 months and negative interest rates last that long afterwards too. That&#x27;s three years of negative rates. If it&#x27;s in the 1-2% range, That&#x27;s about 3-6% lost by keeping it in cash. So your worst case is 3-6% lost.<p>Compare that to not working diligently, taking on too much debt, or not saving enough, your worst case of 3-6% is a drop in the bucket. We&#x27;re likely to do much better than that worst case.<p>I would, however add an item to your list which might be implicit. Invest your long term savings once you have more than a solid emergency buffer. Find a robo-advisor if you want to keep it simple. In 30 years it&#x27;ll have grown a ton.

Great question. Probably it&#x27;s a good moment to think about what we are doing and how to improve it or change it. We are traversing an historical moment in several fronts and we need to learn and go forward. Not only one answer, not only one recommendation.<p>General advise, don&#x27;t stop saving. If you already have a regular habit to save part of your income and you can afford that, continue as far you can. Look for the long term.<p>Take time to analyze your current status and organize your decisions based in your goals and try to take advantage of the current configuration, but don&#x27;t do the contrary and don&#x27;t take decisions only based in current situation.

Thinking about the same and doing a deep dive in real estate actually (not thinking of investing through funds but rather doing buy-to-let). Any solid resources &#x2F; strategies recommended for a complete beginner?

The easiest and least exciting answer is to buy treasuries now as rates have not hit rock bottom and if the crystal ball said interest rates were lower in the future, bonds bought now would raise in value just like in normal times. Someone bought a 50 year government bond in Austria I think and the interest rate moved a smidge and the value of his bond went up a whopping 50%<p>I was laughing when greek debt was issued with sky high interest rates. Since it was back stopped by the ECB some saw it as a no lose scenario. I wonder what happened to those bonds. They aren&#x27;t in default afaik.

For the most part, the standard strategy still works fine; spend less than you earn, keep an emergency fund, invest in low-fee stock&#x2F;bond funds like the ones recommended here <a href="https:&#x2F;&#x2F;www.bogleheads.org&#x2F;wiki&#x2F;Three-fund_portfolio" rel="nofollow">https:&#x2F;&#x2F;www.bogleheads.org&#x2F;wiki&#x2F;Three-fund_portfolio</a>.<p>As real interest rates go lower, the cost of capital goes down. That would make some capital intensive businesses possible&#x2F;profitable that wouldn&#x27;t be otherwise.

&gt; I was brought up to work diligently, not take on debt, and save - a simple approach to building wealth - but I&#x27;m concerned that will put me at a disadvantage under an economic system with negative rates.<p>Interesting take. Why would you be at a disadvantage and to whom would this be in relation to? I think it&#x27;s fair to say that in the very long term inflation, etc will erode the value of your cash, but I imagine that there is still value in saving. I&#x27;m not sure these rates will last forever anyway.

Curious to hear other people’s thoughts but don’t think you can look at negative rates in a vacuum, but rather also have a view on inflation as well as asset prices (housing, equities, etc)<p>E.g. in a world of negative interest rates and 0% inflation just holding physical cash solves most of your problem - however that does not solve your problem in a world of positive inflation and negative rates - then you need to be able to make up the difference on asset price gains...

Low interest rates mean that you need more risks for the same return. It means investing a portion of your savings in emerging market bounds, corporate bounds, stocks, real estate.<p>This of course is not as straightforward as putting your money in a saving account. But it is also not as complicated as you might expect. You need to decide what risks you are comfortable with. How do you view the world and the markets in 5-10-20 years and do your research.

I would never advise anyone to do that yet with a substantial amount of their wealth, but: take a look at MakerDAO&#x27;s DAI. It is a stable crypto token that uses a basket of ethereum-based tokens to keep its value locked to the US Dollar.<p>It also provides a system where DAI holders can lock their assets and receive 2%&#x2F;year. So, if your concern is just to get a positive savings rate, you could take a look at it.

I recommend you to read the book `intelligent investor` by Ben Graham.<p>If you don&#x27;t have the time, read chapter 8 and 20, as Warren Buffett has recommended it. It might not teach you how to prosper [under negative interest rate] but I think it will give you something to work on and provide you with a good framework in investing.<p>I&#x27;m not a financial advisor so I cannot give you advice but I think investing in yourself is a sound advice.

If you have a deflation and negative rates then you should hold to your money because year after year everything around you is getting cheaper. So delay consumption. Hold the cash. You will get better deal next year.<p>If you have and inflation and negative rates then this is just a temporary anomaly in monetary policy. Don&#x27;t hold the cash. Borrow at fixed rate and invest risk free.

This is one take —- 0% or negative interest rates are a signal that future consumption is more expensive than current consumption.<p>For example, all my furniture is ~10 years old from Ikea. I’ve always wanted nicer things. The fence in the back needs some repairs. Maybe I should finally hire a contractor to fix it.

Looking into &quot;averaging down&quot; or &quot;tranching in&quot; and go into SPX. Unless you know how to thoroughly invest in companies, you&#x27;re betting on the US economy recovering at some point. Statistically significantly higher returns than any other option out there.

I’m a fan of investing in myself when inflation is high or rates are low. Education, or opportunities.<p>Also a good time to shop for a credit card with a better rate.

Chinese bonds? Yields were not bad as of late

The thing about prospering under negative interest rates is that Epstein didn&#x27;t kill himself.

Why does 0% interest rate mean that it&#x27;s hard to prosper?

Create value.

Good question. I’d like to hear people’s thoughts too.