Managing investments isn’t easy. The factors that can affect the value of one’s assets can be mindnumbing. Proper and prudent management requires constant awareness of all market conditions, including interest rate.
It also requires an understanding of how a change in interest rates may affect performance of your investments and strategies to be able to determine the reactions to any change in rates. I call this “cause and effect.” Then you have to be able to factor in any expenses related to making or failing to take action.
The Federal Reserve controls the money supply and thereby affects its cost and availability: interest rates and available credit. U.S. banks borrow money from the Fed to lend to customers. The interest rate charged by the Fed, the discount rate, is set by the Fed’s open market committee. The higher that rate, the less money banks are willing to borrow and push into the economy. If too little money is pushed into the economy, consumers and businesses may have less to spend.
As the saying goes, what goes down, must come up. Interest rates just tend to work that way, which has many investors currently reevaluating strategies. But don’t be quick to make changes. Interest rates are historically low and really have one way to go — up. The real question: When are they going to start to rise? Sure, rising interest rates can hurt some strategies. Other strategies, however, can aid you in managing the risks of rising interest rates, including a laddered bond portfolio. The goal is to identify the appropriate strategies for your situation.
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Over time, your financial goals, the amount of time you have to invest and your tolerance for risk will change as will your financial plan. Today, most investors understand this and realize the value of diversifying their investment assets.