(MONEY Magazine) -- While stock investors have gained from the Federal Reserve's efforts to hold down interest rates and stimulate the economy, these are the worst of times for savers, who are getting nothing for their money. All that's about to change. Here's why:
Start with the dollar. When the Fed orders more money printed, as it has since the financial crisis, existing greenbacks decline in value.
That means a) your dollar buys less of a good priced in another currency, and b) the U.S. eventually must pay higher rates to investors so real returns don't fall below those offered by countries with healthier currencies. We've seen a), with the dollar down 9.8% against the euro this year; b) can't be far behind.
Second, the sometimes-late-to-the-party ratings agency Standard & Poor's opined in April that if Washington can't get our deficit under control, the nation's ability to meet future obligations could be jeopardized. Bad risks pay more in interest.
Next, add in commodity inflation caused by fast-developing countries scooping up raw materials. If the Fed fears that will set off a broader inflation outbreak, it will raise rates.
Finally, there's history.
The Federal funds rate, which the central bank uses to push general borrowing costs up or down, peaked at 19.1% in 1981. It's now at 0.1%. Thus the future direction of rates seems clear. So how do you save and invest? Work on these strategies.
If you're parked in low-yielding CDs and money-market funds because you like their safety, one option is short-term "laddering," in which you spread your money among CDs with different maturity dates, going out no further than, say, three years.
Lawrence Glazer, managing partner at Mayflower Advisors in Boston, says this plan is "not sexy, but it is very practical."
As rates move up, your shortest-term CDs come due and the money can be reinvested at higher levels. You tie up less than you would plowing everything into a five-year CD, and you earn more than you would holding only three- or six-month versions.
Further out on the risk spectrum are bond mutual funds. As rates rise, bond prices fall, so funds can lose money.
Fortunately, bonds don't all march in lockstep. That's why Doug Flynn of Flynn Zito Capital Management in New York suggests "strategic" funds holding a mix of assets with different credit quality and maturities, including government, corporate and international issues. His pick: Fidelity Strategic Income (), up 10% over the past year.
As for stocks, companies that depend on cheap financing may find their margins squeezed. Those with little debt or lots of cash, though, will have room to expand and buy competitors.
The jury is out on which industries will triumph -- we haven't had a sustained rise in rates for 30 years -- but information technology, industrials and health care are expected to do well.
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