The Federal Reserve ended the year with yet another rate hike. Even if inflation slows as expected, analysts still expect a further gain of at least 75 basis points. You know how rising interest rates can hurt your retirement savings, but there are ways to take advantage of it.
Benefiting from a high interest rate environment is nothing new and not rocket science. These strategies have been employed for generations when rates were high. Over the past 20 years, the Fed has employed quantitative easing to keep rates low, so there has been little opportunity to use these approaches.
Here are four scenarios that benefit from higher interest rates.
Reduce inflation risk
The Federal Reserve has raised interest rates to combat inflation. At least, that’s the theory. I hope it works and this isn’t another example of generals fighting the last battle. Everyone benefits from it in different ways.
“When interest rates rise, the cost of borrowing money increases, which means investors have to pay more to borrow,” Teifke says. “This makes it harder for people and businesses to take out loans and reduces the risk of inflation. There is a possibility.”
Safer investments offer higher yields
If you have a variable rate mortgage or are considering a mortgage, you know what happens when interest rates go up. Increased debt repayment burden.
The same applies to fixed-income bonds and dividend-oriented stocks. Yields on these securities reach new heights. Even your bank account starts spitting out higher interest payments. With interest rates approaching zero, these “safe” investments are nothing like stuffing your mattress with money. As interest rates rise, these same investments start paying attractive dividends and interest.
Mary Popovic, Senior Investment Analyst at Wealth Enhancement Group in Madison, Wisconsin, said: CD rates, government bond yields, bond yields, and money market rates have risen compared to the last decade. ”
What does this mean for you? This means we can now take a different approach to our total savings philosophy. The Federal Reserve’s actions have only added arrows to your investment tremors. Safe alternatives can be seriously considered again.
“The biggest advantage of a retirement portfolio when interest rates rise is that you can get a yield on a very conservative investment,” said Herman (Tommy) Thompson Jr., financial planner at Innovative Financial Group in Atlanta. I’m here. “For the first time in over a decade, investors can now receive 2% or more on money market instruments and short-term Treasury bills. It has a positive impact on returns.”
falling security prices
It’s not just high yields. Another consequence of rising interest rates offers an attractive outlook.
“There is an inverse relationship between yield and price,” says Popovich. “When interest rates rise, so do yields, but as a result, bond (and stocks in general) prices fall.”
While most of the interest may lie in higher bond yields, equity investors can also spot opportunities that have been unavailable for some time.
“Second, retirement savings portfolios that invest in stocks can also benefit from higher interest rates,” said former investment banker and founder of Top Mobile Bank, based in Bern, Switzerland and Ann Arbor, Michigan. One Tommy Gallagher says: “Higher interest rates tend to make stocks more attractive to investors because they can generate higher returns than bond investments. It can lead to higher returns for those who do.”
If you still donate to your retirement account regularly, you can calculate the dollar cost average at the discounted price of all securities. If you buy low today, you can sell high when you retire.
Avanti Shetye, founder of Foolproof Financial Freedom in Ellicott City, Maryland, said: “When you add capital to your retirement savings, you can deploy this additional capital to earn more income over your target period.”
Reduced portfolio volatility
If you’re a value investor, you know why this is true. Ben Graham recommended that “intelligent investors” should compare investment candidates to “risk-free rates of return.” Risk-free rate of return refers to the interest rate offered by the safest investment choice.
For many, the risk-free rate of return may be the current coupon rate on 5-year government bonds. Today it is a shade below 4%. A year ago he was just above 1%.
Think about what that means when you invest in stocks. A year ago, the next he had to make sure he was making more than 1% annual profit over the next five years. Today, such an investment candidate should earn at least 4% annual return. Naturally, this reduces the demand for inventory. As mentioned earlier, one of the consequences of this would be to lower the price of the stock.
Declining demand, however, leads to a different result. That’s lower volatility.
said Matt Teifke, founder and CEO of Teifke Real Estate in Austin, Texas. “This could mean retirement savings investment portfolios run smoother during times of market uncertainty.”
take heart Rising interest rates can hurt you in the short term, but if you use your investment card correctly, it will pay off in the long run.