How Will Higher Interest Rates Affect Your Investments?

HOW WILL HIGHER
INTEREST RATES AFFECT
YOUR INVESTMENTS?
By www.ProfitableInvestingTips.com

http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments
The US Federal Reserve Open Market
Committee raised interest rates again
last week by a quarter of a percent.

How will higher interest rates affect
your investments?

There are several ways that that higher
rates will affect your portfolio both
immediately and over the long term.
Here are a few thoughts on the subject.

Immediate Effects of Higher
Interest Rates on Your
Investments

•U.S. Treasuries
•Corporate Bonds
•Dividend Stocks

U.S. Treasuries and
Corporate Bonds

If you currently have U.S Treasuries,
AA, or AAA corporate bonds in your
investment portfolio, they just became a
little less valuable when the Fed raised
rates last week.

And, if the Federal Reserve follows
through with its projections and raises
rates twice next year, these investment
vehicles will become progressively less
valuable.

However, if you simply hold your bonds
or Treasuries to maturity, you will not
lose money on these investments.

And, if you wait for higher rates, you will
be able to purchase these bonds and
treasuries and earn higher interest
rates.

Ideally, you will buy these when rates
peak.

Then you will be earning a good
interest rate and your bonds or
treasuries will become more valuable
as rates start to fall.

Dividend Stocks

Dividend stocks like utilities are often
considered to be proxies for bonds.

So, when rates go up but dividends do
not, dividend stocks lose value.

Providing that the basic business of the
dividend stock does not change, such
as with a utility, these investments will
perform like bonds and Treasuries.

But, if higher rates usher in a recession,
many now-strong dividend stocks may
take an earnings hit as well.

Over the long haul the value of these
investments will depend on
their intrinsic stock value, in which
case the effects of higher interest rates
on the general economy will be
important.

Longer Term Effects of
Higher Interest Rates on Your
Investments

CBS News writes that the U.S.’s
interest payments are about to
skyrocket.

This is a big deal because it affects all
sectors of the economy, government,
and personal finances.

A recent Moody’s analysis noted that
persistent high debt, among other
factors, would lead to “persistent
deterioration in the U.S.’s fiscal
strength over the next 10 years.”

High federal borrowing could also
crowd out other types of investment.

The federal government borrows
money by issuing treasuries; the
investors who buy them are effectively
lending to the government.

A very high supply of treasuries could
effectively starve other parts of the
economy of investors’ money, some
analysts say.

“If you issue more and more treasuries,
the dollars you use to buy them need to
come from somewhere.

They could have gone into the stock
market, or into other investments,”
according to Torsten Slok, chief
international economist at Deutsche
Bank.

In the article they show a graph from
the Office of Management and Budget
showing the expected huge increase in
payments on U.S. debt.

As the number of US dollar available
for investment dwindles the US will not
be the first country affected.

Emerging markets are already suffering
and there is the prospect of massive
business failures in China this coming
year.

Despite Trump’s America First rhetoric,
this is an interconnected world and
trouble offshore will come back to bite
the USA in the proverbial backside as
well.

Interest Payments on US Debt

The US debt is already huge and due
to the Trump tax cuts it is going to be a
lot bigger.

What is really worrying, however, is the
size of the debt compared to the US
gross domestic product, GDP.

The game plan with recent tax cuts was
that the resulting economic stimulus
was going to raise GDP above 4%.

That has not happened despite lower
unemployment rates and, until now, a
surging stock market.

Many point to higher interest rates and
their fallout as a reason that the stock
market is getting bearish.

US Debt and US GDP

More Rate Hikes on the
Horizon

Bloomberg writes that we are not going
to see the death of rate hikes just yet.

Money markets appear to have
completely nixed the idea of Federal
Reserve interest-rate hikes in 2019,
although the outlook may not be so
simple.

As the Fed jacked up rates by a quarter
of a percent in their most recent
meeting, predictions of no more rate
hikes seem to have been more wishful
thinking than not.

The Fed is famous for thinking long
term and is almost continually at odds
with the short term political concerns of
congress and the U.S. president.

Too-low interest rates have an effecting
of distorting markets.

Real estate prices escalate because
folks can buy more for their dollar due
to the lower cost of servicing their debt.

Investors tend to bid up stock prices
and overheat the stock market.

As Investopedia notes, the effect
of interest rate changes can take up to
a year to be felt.

Interest rates affect the economy by
influencing stock and bond interest
rates, consumer and business
spending, inflation, and recessions.

However, it is important to understand
that there is generally a 12-month lag in
the economy, meaning that it will take
at least 12 months for the effects of any
increase or decrease in interest rates to
be felt.

By adjusting the federal funds rate, the
Fed helps keep the economy in
balance over the long term.

However, the stock market continually
seeks to predict the course of the
economy and the value of investments.

And the stock market has been very
volatile and in correction mode.

How higher interest rates will affect
your investments will be largely
negative over the short term as rates
go up and the costs of borrowing rise.

Over the longer term the risk is tied to
the drag on the US economy and US
investor caused by an ever-increasing
US debt burden as more and more of
the results of US productivity are eating
up by servicing the debt.

Is there a place to hide as this scenario
plays itself out?

If you like cash positions when the
market is volatile, a smart move is to
build a “ladder” of short term AA or AAA
bonds or US Treasuries.

A bank account is also protected by
Federal Deposit Insurance.

Then the issue is predicting a market
bottom, providing that there is one as
the long term effects of mounting US
debt play out.

How Will Higher Interest Rates Affect Your Investments?

Recommandé

Recommandé

Contenu connexe

Tendances

Tendances (17)

Similaire à How Will Higher Interest Rates Affect Your Investments?

Similaire à How Will Higher Interest Rates Affect Your Investments? (20)

Plus de InvestingTips

Plus de InvestingTips (20)

Dernier

Dernier (20)

How Will Higher Interest Rates Affect Your Investments?