"Addicted to Love"

           "Addicted to Love" was released by British songwriter Robert Palmer in 1986. It was the third song on Palmer's studio album "Riptide". The song topped the Billboard Hot 100 charts as well as the Billboard Top Rock Tracks in 1986. The song sold 500.000 copies in the U.S. and was made popular with the music video featuring fashion models dressed in black see-through dresses and wearing heavy make-up. The models were intended to look like mannequins and were reportedly served wine during the make-up session, making them tipsy for the video. The video was so popular that Palmer used the models in successive music videos

     Love isn't the only thing investors have become addicted to in recent years, 5% yields on money market funds were also very attractive. Unfortunately those days are over, at least for now. Money market yields are now slightly below 4% and are expected to drop even further in December and the new year. The current Fed Chairman (Jerome Powell) will be replaced next May by Donald Trump's choice for Chairman. It's no secret that the Donald wants lower interest rates and his choice will accommodate him. The reason lower rates are so important to the current administration is the heavy debt load the U.S. must carry ($38 trillion), means interest is $970 billion for 2025 and projected to top $1 trillion for 2026. This is money that could be spent on defense, social programs, tax cuts, or whatever the politicians decide.

     I personally don't like the idea of lowering the national debt on the backs of retired Americans who are living off their savings. Lower interest rates either lowers our standard of living or forces savers into riskier assets like stocks, bonds, REITS, or their proxies. Of coarse the alternative of controlling government spending is almost always out of the question. Lower rates at a time of rising prices for almost every consumer product is an especially cruel outcome. Tariffs are another hidden tax on the American consumer, even if they are reduced, prices seem to have a ratchet effect of staying high.

     So what's the answer to lower rates and lower personal income? In my opinion, its dividends. Unlike interest, dividends are taxed at the favorable capital gain rate if they are qualified (domestic) dividends. One doesn't have to buy individual stocks to generate decent yields, there are many diversified ETF's and mutual funds that will qualify. The main thing to remember is to keep costs low, there is no reason to pay over 1% of assets for an unmanaged dividend fund. For those who like to invest in tax free bonds, there are several ETF's that invest in muni bonds offered by Vanguard and Schwab. 

     We are one year into the new declining rate cycle and it could last for several more years so now is the time to start adjusting to it. An additional benefit to the dividend and muni strategies is that the rate cycle should benefit both asset classes in the form of potential capital gains. Addiction is a difficult thing to overcome so I recommend a  measured approach by not moving too much too fast and remember to always keep several months living expenses liquid. Hopefully these minor adjustments will cure your addiction without any symptoms of withdrawal.