What Rising Interest Rates May Mean to You
20 Oct 2015
You won’t find many financial pundits that don’t agree interest rates are heading up at some point in the near future. The reality is not if, but when. We have been accustomed to very low rates for a very long time. As a “borrower” of money this has worked out great as the cost of money has never been lower. However, as an “earner” of money this environment has been a challenge. Let’s look at a few items that may occur and how this may impact you:
- Returns on cash will be higher
This may seem good but unless inflation stays the course it won’t matter. Your “real rate of return”, that is, the rate you earn after taxes and inflation, will still keep you in the negative. Until rates get above your tax bracket AND inflation you won’t see any real improvement in cash and CD’s.
- Stocks can continue to do well
History has shown that rates increasing are not always bad for stocks. The period from June, 30th 2004 to June 29th 2006 with rates increasing the total return of the S&P 500 was +15.5%.
- Long term bonds may be hurt
Values of bond positions can drop as rates head up especially on the longer term duration holdings experts say. Consider looking at the “duration” of your bond holding and what type of bonds you hold. For example, are they in a “basket” of bonds or are they held individually? This can make a difference.
Some feel the rising interest rate environment amounts to financial Armageddon but with prudent knowledge and careful planning you can be better prepared for whatever happens. Remember, experts have been calling for a rate increase for a while. Probably a good reason to stay out of the prediction business!
Good luck! Jeff
Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results. These are the opinions of Jeffrey Johnston and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.