Why Do Interest Rates Affect Your Investments and What Should You Do About It
By: Michael Carbone, CFA, CFP®
Interest rates and the economy are inextricably linked. Why? It’s because interest rates affect the cost of borrowing money. If the cost of borrowing money rises, consumers may be less willing to buy stuff, and companies may become more cautious with any expansion plans. Economic growth may be affected in either case, potentially impacting the stock market. Also, should you wish to sell a bond early the value of your bonds may be affected since the market value of a bond moves opposite to interest rates.
What should you do about it? There is only so much you can do about interest rates. From an investment perspective, the market is very difficult to predict – especially over short time frames. So, it may be wise to avoid making any significant changes to an investment strategy, based on interest rates. Instead, I believe the average investor should consider whether more practical adjustments make sense based on their situation. Some examples:
- Review your cash management strategy. I believe investors should be cautious when holding excessive funds in cash or cash equivalents such as money markets (i.e., above a reasonable safety margin or level sufficient to cover emergency needs). Many investors are holding above average amounts in savings and short maturity bonds because short term rates are seemingly attractive. This, however, may leave investors subject to potentially lower interest rates in the future. We’ve seen this movie.
- Review the stock portion of your portfolio to ensure it still aligns with your goals. I believe that many investors were caught off guard in 2022 as more volatile stock investments performed so well over prior periods – often leading to relatively riskier portfolios on average. Times of uncertainty may also present a good opportunity to ensure the stock portion of your portfolio is sufficiently diversified.
These are just a few examples of practical areas to review if you’re concerned about interest rates. Please don’t hesitate to reach out with any questions about your financial situation.
Thanks for reading!
Any opinions are those of Michael Carbone - not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
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