How Does the Zero-Interest Rate Environment Affect You?

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The other day a reader emailed me to ask “I’ve read your advice in the Investment Workshop about owning a mix of stocks and bonds, but that was back when bonds actually paid something. With interest rates in the gutter, does that advice still hold?”

Great question. Let’s dig into this a bit, shall we?

During the last economic downturn in 2008, one of the key decisions that helped save the economy (or rather, prevented it from falling off a cliff even more) was that central banks around the world chose to drop their key lending rate to near-zero. This had a stimulative effect on the economy because it lowered the cost of borrowing, allowing more businesses access to capital to stay afloat, and simultaneously encouraged investors to pile their money into the stock market since bonds were paying so little.

So when the pandemic hit the US in February/March, dropping interest rates to zero was one of the first things the US central bank did. The Canadian central bank followed suit, as did the European Central Bank (though that one was already pretty close to zero already).

So now interest rates all around the world are sitting at nero zero. Savings accounts have gotten massacred. Government bonds are paying next to nothing. Hence the questions filling up my inbox. So how should our readers react to this new zero-interest rate environment both in their portfolios and in their life?

Here are a few of my thoughts on this.

Don’t Buy a House and Get Into More Debt

FIRECracker and I don’t really write about Home Boners that much these days, because there’s only so many ways we can say “you’re all idiots” without it becoming monotonous, but one of the most baffling and most frustrating things that have happened during this pandemic is that after a frozen spring where everyone was locked down, the summer has seen a massive rebound in the housing market.

People have realized that lower interest rates means the bank will lend them more money, and have reacted by going on an epic home-buying orgy, sometimes getting into bidding wars over houses they haven’t even visited because social distancing has prevented traditional open houses from happening. And in the process getting into even more debt that will weigh on them for the rest of their lives, especially when interest rates inevitably begin their slow climb back up.

This is why I don’t even bother trying to give advice to Home Boners anymore. They’re hopelessly stupid. They’re like financial lemmings, constantly seeking out the highest possible cliff they can find to throw themselves off of. Economy doing well? Buy a house! Economy in the shitter? Buy a house! A once-in-a-lifetime pandemic preventing you from even seeing any properties? Buy a house!

FIRECracker and I have decided that if we ever need to settle down in one place and stop travelling, one of us should get a real estate’s license and just sell homes to idiots. Home Boners are too stupid to have money and are just going to hand their life savings over to someone else anyway, so we may as well take some of it.


Refinance Any Debt You Already Have

That being said, if you already have debt, whether it’s in the form of credit card debt, a mortgage, or student loans, now is a great time to try to lower your interest rates on them.

I recently applied for an unsecured line of credit, you know, for fun, and I got an interest rate of under 5%. That same LOC would have been 7-8% at the beginning of the year, so that’s pretty huge!

So anyone with a balance on your credit card card can immediately bring their interest rate down by opening up a LOC and paying off their credit card with it. Boom! 20%+ interest down to 5% in 5 minutes!

Same goes for car loans or student loans. Check with your lender first to see if you can refinance. If not, find another lender offering a lower rate and retire your high-interest loan with a shiny new low-interest one. Paying 8% on a student loan is SO 2019!

Mortgages can be a bit trickier. Depending on the type of mortgage you have, you may not be able to change the interest rate, but check with your bank about refinancing options. You never know, and it never hurts to ask, right?

Increase Your Equity Allocation If You’re Accumulating

Now let’s talk about investment portfolios. Interest rates sitting at zero have definitely benefitted equities, partially explaining why stock markets are positive for the year even as unemployment is sitting above 10%. Fixed incomes? Not so much.

Ultrashort bond funds, for example, which we used to use to store the dividends we receive over the year, are now pointless. They were a low-risk way of eking out some interest income on my cash in the range of 1%-2%, but now they’re not paying anything at all. What’s the point?

That being said, bond index funds like BND (if you’re American) or VAB (if you’re Canadian) that hold lots of different types of bonds including corporate bonds are still yielding around 2.5%. That’s not as good as it used to be at the beginning of the year, but it’s not zero like the ultrashorts.

Plus, bonds have the additional effect of reducing your overall portfolio volatility, so it still makes sense to own these in your portfolio.

Though, arguably, maybe not as much of it.

If you’re still working and accumulating money in your portfolio, I’d consider bumping up your equity allocation by 5 or 10 percent. There’s just better value in equities right now.

Lean More Heavily On The Yield Shield If You’re Close To Retiring

If you’re close to retiring or about to retire, first of all, great timing.

It may not feel like that right now with everything shuttered and with borders closed, but 2020 saw the end of a decade-long bull market that lasted from 2009 to 2019. And the stock market has already recovered from the recession because of all this central bank stimulus. That means that in all likelihood, the next decade long bull run is just starting, so if you’re just closing in on your FIRE target, you’re positioning yourself for a retirement that’s going to be up-and-to-the-right out of the gate.

Of course, it’s also a zero-interest rate environment, which is not so good if you now need income from your portfolio. The traditional solution of swinging towards bonds is not going to work if those bonds don’t pay you diddly.

But we have a solution here: The Yield Shield.

Even now, there’s still places to find income, and those places happen to be in areas that we already wrote about when we introduced our Yield Shield strategy. Alternative, higher yielding asset classes like Preferred Shares.

As of this writing, CPD, which is the Canadian Preferred Share index that we used to own, is still paying 5.3%.

So it’s still possible to build an income producing portfolio to live off of in retirement. The big difference is, that when I wrote that Yield Shield series those alternative assets were meant to be held alongside traditional bonds. Now that those bonds are paying next to nothing, you may have to build the fixed income side of your portfolio entirely with these alternative assets, at least until interest rates normalize in a few years.


So there you have it: Millennial Revolution’s guide to personal finance in today’s zero interest rate environment. Don’t get into more debt, refinance the debt you have, increase your equity allocation if you’re accumulating, and lean on the Yield Shied if you’re about to retire.

What do you think? Is there anything you’re doing differently with your finances? Let’s hear it in the comments below!

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51 thoughts on “How Does the Zero-Interest Rate Environment Affect You?”

  1. ———–
    “I’ve read your advice in the Investment Workshop about owning a mix of stocks and bonds, but that was back when bonds actually paid something. With interest rates in the gutter, does that advice still hold?

    Hmmm. Bonds are still doing very, very well: 2.5% yield, and it is UP OVER 10% since the pandemic began.

    “I’d consider bumping up your equity allocation by 5 or 10 percent. There’s just better value in equities right now”
    Not sure this is true. Equities at near record high now (Tesla with a PE ratio approaching infinity). I would cut equity and pile into BND.

    1. Bonds have gone up mere 10% since March? Did you even check how much equities have increased since March? Good luck living with 2.5% with no tax breaks.

      #2, you sound like another pissed off John Doe who missed the run…

    2. I agree with your thoughts on equities, they look very overpriced. Bonds also look way overpriced tho. Buying something that yields essentially nothing requires gains to all be from price increase.
      Real estate seems like the only decent option recently. Good deals can be had in the rust belt states or in the country. I wouldn’t consider the cities as they are still way too high.
      Wish there was more Math Shit Up in this post. Equities could easily drop by half if the Fed stops buying. Equities all time high multiples, bonds all time high lowest ever yields. I’m really doubting the 4% rule. Cheap real estate seems like the only ROI worth the risk.

      1. I don’t try to predict the future direction of the stock market. All I know is that the first things central banks did was drop interest rates to support equities and will be continuing to do so for at least the next 2 years. Never bet against the Fed.

  2. I agree home ownership is not an investment, its closer to owning a car except you do have a chance at the asset keeping up with investment in a home, where cars generally all go to zero value eventually. But we all have things we find value in, in our case owning a modest house was one my wife and I shared. So even though it wasn’t a great investment we really gained huge emotional rewards for the small amount of extra money we spent owning versus renting. Raising three teenagers at the same time, having some space really helped there. We’ve been in this first and only house for four decades and of course it was paid off long ago. It represents only a single digit percentage of our net worth so we don’t really care what it would sell for now. I don’t see it as being necessarily stupid to buy a house. Its stupid if you can’t easily afford it and still achieve your other financial goals or if owning it doesn’t truly match your values. Its a luxury purchase in a way, and those are generally not smart unless they represent an insignificant part of your net worth and really add value to your life. But I feel like there are still a lot of people for which both of those are true. But you are speaking the truth, just felt kind of harsh as a home owner, but I am not your target audience, being an ok boomer. But I am a big fan! We keep about 50-55% of our portfolio in equities, mostly index funds, and have the rest in bonds and some in cash, a little bit in alternatives, gold, commodities, REIT’s.

    1. Agreed. Other than the fact that we lucked out and bought low and actually have made significant equity in our home, the real benefit is having a place to call home. In all the ways. It just depends on your personality and goals. Luxury or not, it is well worth the cost. Let alone, housing is super tight in my neck of the woods and my mortgage cost wouldn’t get me the same in rent at all. And I love my community. It is priceless.

    2. Great reply, I cant agree any more with you. Home ownership can be very rewarding if it is fully paid for, if it fulfills your goals and you manage to achieve FI regardless of the home. But it has to work out mathematically

      1. When interest rates go up, PFF will get creamed. It’s interesting to see how everyone is an expert but no one really knows what they are actually recommending.

  3. Not sure which bank you keep your savings in if you are making less than 1%. You have not been following EQ bank since they still pay 1.7% on savings accounts.

  4. I differ a bit on the question of debt. I’m taking advantage of the super low rates now to invest using margin. Interactive Brokers is giving me a rate of 1.59%. I only stick with a globally diversified ETF (VEQT), and only leverage about 20-30% of my portfolio. Since VEQT is one of the securities that’s eligible for reduced margin, it is less likely to be called (they’ll let you go all the way down to 30% equity/70% loan before your funds are forcibly liquidated).

    If the global stock market were to experience a 60% drawdown (worse than the GFC), you would still be safe with a 72% equity/28% loan ratio without getting a margin call. The drawdown is also very unlikely to happen overnight, so the decreasing margin buffer would be a signal to average down and buy stocks as they get cheaper, which is exactly what you should be doing anyway in the accumulation phase of investing.

    This gives you some of the benefits of a mortgage (leverage) without dumping your net worth into a concentrated illiquid asset like a house.

  5. Wanderer,

    I have been using VAB for my bonds, and I have already dropped the ratio (raised it for CPD).

    But I noticed you have been using ZAG now, instead of VAB. I’ve looked and they seem pretty comparable between the MER and returns. ZAG does seem to have more corporate bonds. Is that the reason for the change?


    1. Oh both VAB and ZAG are pretty much the same, either is good. Many years ago when I had a financial advisor they chose ZAG for me and I just stuck with it for historical reason, but again I’d be comfortable recommending VAB as well.

  6. Now that those bonds are paying next to nothing, you may have to build the fixed income side of your portfolio entirely with these alternative assets, at least until interest rates normalize in a few years.



    I don’t hold bonds for the yield. That was never the intent. I hold VAB and VSB which are 6% and 12% of my portfolio respectively. It’s there as dry powder and a counterpoint if markets decide to tank again the way they did in February and March. Current yield for those two are 2.60% and 2.29%. Seems fine to me for the beneficial stability they bring to my portfolio.

    ZPR makes up 15% of the portfolio currently. I dumped it early January to buy VAB and bought it back March 31. I also have 2% cash. I have another 3% more coming in cash in the next 2-3 weeks which should bring total cash to 5%. Likely I will invest it in more ZPR but 20% of my portfolio in ZPR is the most I would do at this time. Anything beyond the 20% mark is going to VSB. Don’t forget that ZPR and its counterparts, like CPD, dropped an eye-watering 36% in March from the beginning of the year. Thankfully, I avoided that drop but most did not. It’s also not the first, or last, time that it has/will swing like that. Recommending readers to dump all their fixed income component of their portfolios into something like that is financial suicide for those who don’t know when to hold it and when to dump it for something like VAB or VSB.

    There’s a reason for having asset allocations in an investment portfolio. Throwing that all out because you want to be greedy on yield (versus reducing risk) is not one of them. I’m nicely in the black for the year. Slow and steady wins the race.

    That may seem harsh but you have a lot of novices who read your blog. I remember many of them indicating they were 100% equities prior to everything crashing. Some may have done fine throughout the last 6 months however I imagine many are still hurting (swimming naked) from their greed.

  7. I personnally own really long terme bonds etf like XLB that have a 23 year average. The yield is a little better than VAB at 2.86%.

    But when you do half half with preferred, when one fall, you sell the one that go up and buy the one that goes down.

    So your fixed income give a little bit more of yield, and the overall capital hasn’t changed that much since the crisis.

    For the moment I am selling XLB to buy HPR. Preferred seems to be at a steal since they tend to be positively correlated with interests rates.

  8. I am fortunate to collect a solid DB pension and partner collects small CPP. I count that as my bond (fixed income) portion so all our personal investments are in equities. Stocks and ETF’s that pay dividends. That flips that traditional equity/fixed income ratio on it’s head. Currently 77% fixed income with pensions and 23% equities. At age 65 that ratio becomes 90/10. I will not hold any form of fixed income.
    Our house is an asset and we have used a secure HELOC to access it’s value. That money was used to invest, buy real estate, play etc…
    Still hold a mortgage and likely always will. As long as the net worth to debt ratio is at least 2:1 and cash flow is solid, life is good.

  9. I have appreciated your blog and read many of your posts and also your book. I hope they continue to positively impact peoples’ lives. I have also appreciated your arguments against home ownership as it has challenged my decision making on the subject.

    In this post your referred to home boners as morons. I agree that the general argument that personal finance can be informed through simple math mostly – and numerical methods for those who are literate in that – to optimize decisions for wealth accumulation. But it is offensive to impose your value system on those who have a different perspective than you. I believe that different people, even with the same level of numerical and financial literacy, can draw completely different conclusions to apply to their lives and still be making the best decisions for their unique situation.

    I hope that through your blog and book more people take the time to competently assess their financial situation or seek help to do so; however once that is completed I believe it is reasonable for people to still make different decisions because the obligations and values that people have can vary in many ways. So my offence was that you had labelled people, who may also be making informed personal decisions, morons inappropriately.

    I also don’t think calling the people who would most likely benefit most from your body of work morons is a responsible use of your platform. I think you could do better than that.

    1. I guess you didn’t understood from where they came. In Toronto, houses seem to basically be a financial suicide, if you buy one, you no longer have any money to put aside your current expenses and your mortgage. And that’s a house you bought without an evaluation and after a bidding war where you paid a price over asking.

      After that, all your peer ask you why didn’t you take a huge risk without an inspection, overleveraged yourself and just stop diversifying your assets? And then, mind your answers because your options are: a) explain why you didn’t do it and they will perceive a critic even if that’s not your intent b) say that you are in shame because you’re so soft and can’t take that amount of risk.

      While thing are not as extreme as Toronto where I live, It took me years to explain to my friends that I have a decent financial plan and that renting is actually a thoughful choice and not a stupid move.

      Thus, while they seems to caricature a little their position, I find it refreshing that there is someone out there that actually advocate for avoiding the home ownership cult.

  10. I own preferred shares in a few companies, bought in the last few months. They’ve done very well as they’ve increased 20% in value, plus pay a 7.5% dividend on my cost. This sounds great, but I am aware this is not a set and forget investment. At some point inflation and interest rates will go up, especially with all of the stimulus measures. When this happens, the share prices will drop substantially and a 7.5% dividend will not look so good. Inflation could even go above 7.5% (it has happened before), which would mean a negative return.

  11. Hey K&B I always love your articles. THANK YOU.

    My question is (if you can stomach the volatility) then why would you ever do anything other than 100% stocks and shares even if you are close to or in retirement?

    I love reading your stuff and am always fascinated!

    1. they’re a lot closer to being 100% equity anyway but don’t know it since their “bonds” have dividend shares and REITs. it’s why their portfolio swings more than they expect it to.

    2. Because when you retire you need the income. Remember that if you’re forced to sell in a downturn during the first 5 years of retirement, that’s how your portfolio fails. Swinging towards fixed income and higher yielding assets is a way to avoid that risk.

      1. This where you still haven’t had your A-HA moment yet, despite being math oriented. Yes, agree selling in downturn in first 5 years is a sequence of returns risk … but there’s no difference selling shares in a downturn vs receiving dividends in a downturn.

        sorry to burst your bubble but yield assets don’t protect from that, despite giving the illusion to. Please google the dividend fallacy

        Putting high yield assets into what’s supposed to be a bastion of stability for your portfolio in bonds is ironically taking on more portfolio risk of failure – what you’re trying to avoid in your tweaking.

  12. My take on housing is diversifying the portfolio. I was following this blog when i started planning for investing after i bought a house and started feeling comfortable with additional income from basement.

    Today i tried to do the math by comparing two scenarios. Lets see if my decision is correct or not.

    My case: 500k detached house (paid off) in toronto and 500k in index ETF suggested here.
    500k House is giving me return of $12k + Appreciation(currently 1M).
    ie., Assuming 3bedroom rental in my area is $2k/month = $24k/annul
    Property tax+utilities+insurance= $1k/month = $12k/annul
    Basement rental income = $1600/month = $18k/annul
    So Housing Math= $24k+$12k(taxes)-$18k(income) = $18k+asset appr
    If i invested the same 500k in QT the same amount @6 return = $30k
    So QT Return = $30k-$24k(rent) = $6k with little/no asset appreciation

    Finally My 1M diversified portfolio math as follows after FI (retirement)
    $18k(from house after living for free)+$30k(from QT)= $48K
    My total expenses (excluding accommodation)= $24k
    Which is giving me back $24k after covering my retirement expenses
    PLUS appreciation of home

    If i had invested the whole 1M in to QT, the numbers follow below
    QT Return@6% = $60k-$48k(expenses) = $12k with little/no asset appreciation

    So the math showing diversifying the portfolio with house (if available in reasonable price with income generating) wins over complete investing in ETF’s.
    Well after going back n forth, i have decided with house+ETF at 50-50 gave me peace of mind with roof over head and stability for the family (spouse not into travelling, kid still going to school).

    Its YMVY , but in the end it seems to be working for my case.

  13. Calling people who’ve reached a different conclusion than you on home ownership ‘idiots’ isn’t really constructive. Not everyone lives in a VHCOL real estate market like you guys did so owning a home is not a poor decision in all areas. I can agree there’s definitely a cult of home ownership in North America but name calling doesn’t really enhance your point like, say, math comparing renting and owning might have to dissuade people from home purchasing in a low interest environment.

    1. I’m in Australia and we have used the current low interest environment to leverage heavily into equities.

      We have been dollar cost averaging our savings into equities for the last few years but have been using leverage as a way to shorten the time to FIRE. Currently have taken out a loan for $450k which about $340k is already invested plus what we already had invested as collateral. With the remainder we will continue to dollar cost average in and purchase about $40k equities every month until it is gone and then reapply for a limit increase. By this time next year we should have our portfolio sitting at the $1m mark ($600debt & $400kequity) & based on my calculations will have the debt paid down in 4-6 years depending on how hard we go at the debt. Interest rates are quite reasonable at 3.9% for the debt & no margin calls as it’s not a margin loan. It’s just basically a mortgage but for shares instead. Best of both worlds. Invested in the highest performing asset class which is equities & leveraging in which is what property investors use to get more bang for their buck. My wife & I both work full time & live completely off her wage & invest my whole income which is substantially larger. This will be used to purchase more equities and service the loan easily plus the 5-6% dividends (about $60k after tax on a $1m portfolio) we’ll receive annually will help service the loan & also purchase more shares. Little bit different from what most people are doing but works for us.

  14. Yah, I just don’t get how people are getting the money to even buy overpriced real estate these days. Millions unemployed and jobs lost. Even record low interest rates doesn’t help when your struggling to put food on the table. Anyways, I will keep adding to my portfolio whenever I get extra cash and increase my future dividend income.

  15. wow terrible advice. buy more equities while pretending they still count as bonds. sure, what could go wrong? this type of nonsense is stuff you do yourself in secret but not something you write an article on and actually recommend it to others in the open

    sadly you’re pushing a lot of investors who don’t know better to bearing more risk than they realize. it’s the blind leading the blind here.

  16. this idea that we just had a stock crash so we’re now moving onto the next decade long bull market is also faulty thinking. its much like gamblers at casinos who think because they’ve lost 3 hands in a row, theyre now due for a win on the next hand. in reality, nothing has changed in terms of odds for the next outcome.

  17. it’s lost on most people to consider inflation relative to interest rates. the relative spread is what’s important, not the absolute number of the interest rate. And maybe in that view, bonds are no better or worse than before.

    i.e earning 2% interest in a 3% inflationary environment is no better or worse than earning 0% interest in a 1% inflationary environment. Both are lagging inflation and your spending by 1%. That is much of what we see now, inflation expectations dropping and the rates matching.

    As an example to highlight the point, I’ll take earning 0% in a 0 inflation environment than earn 3% yield in a 4% inflation period. This is not intuitive as we assign a lot of value to the hard numbers and don’t perceive the relative value of these naturally

  18. The debt level of worldwide government are similar to post WWII debt level. And how the governments paid their debt at the time? With low interest rates and high inflation for 10 years!!
    Current government cannot afford to raise interest for a long time and they will desperately need inflation.
    The bubble of everything will continue for a while… housing, stock, bond etc. Too much money on the market. It is first inflation of rich assets and on a later stage consumption inflation.
    For now I just want to see the effect of the end of government intervention in housing market (eviction suspended). But after (in 2021), I believe it will be a good time to go in low interest debt (mortgage).
    The inflation will pay your mortgage as well (just as governments do with their debt).

    I would be interested to get your idea on this, before I commit to a mortgage myself.

  19. Wanderer, when in the year do you withdraw from your investment accounts the dividends you’ve earned over the previous 12 months (assuming you do this annually)?

    Also, when the dividends are earned, where do you put the funds while waiting for the withdrawal day?

    Thanks in advance.

  20. What about owning GLD and SLV ETF’s as a hedge against money printing and inflation? I own VCN.TO, VUN.TO and VAB.TO as well as XEF.TO, XEC.TO so I’m pretty diversified but precious metals look tempting with all the government debt and failing USD?
    Your thoughts?
    Thanks in advance.

  21. Perhaps you could write an article about obtaining the lowest possible interest rate for a line of credit. I have been trying to get below 5.45% (prime + 3%) for the last six months to no avail. My main lender has been stuck at prime + 3.75% since 2007. Credit score is almost at max possible, no current debt, plenty of investments and steady jobs. I tend to use our existing lines of credit to buy investments when markets tank so that we do not carry a huge cash cushion that is not really growing. The joint EQ Bank HISA I share with my wife is ok, but 1.5%-2.8% is nothing compared to having half a years worth of income properly invested. Plus we get to deduct the interest payments!

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