The Federal Reserve has raised interest rates again, continuing to maintain a strong stance against historically high inflation.
What is that doing to your investment portfolio?
“Interest rates are a critical input to the valuation process—and they affect the value of stocks and bonds,” said Robert R. Johnson, a professor of business at Creighton University’s Hyder College in Charlottesville, Virginia. Time’s gravity on property prices will be much lower.’ The result of near-zero interest rates was an increase in stock prices because the incentive to hold risk-free government debt decreased. All else being equal, firms pay higher interest costs, reducing the profitability of businesses. Third, many investors use margin-borrowed money to buy stocks and other assets. Rising interest rates reduce the appeal of borrowing on margin. Fourth, newly issued securities (higher promised payments) than others. Given the demand for securities, there is a simple substitution effect associated with an increase in interest rates.
If you’re retired or about to retire, the Fed’s rapid shift from quantitative easing to hawkishness has taken its toll on your financial situation at a time when you need stability and security.
“Rising interest rates have a negative impact on retirement savings investments, because investors find it difficult to make returns,” said Tommy Gallagher, founder of Top Mobile Banks, based in Bern, Switzerland. and Ann Arbor, Michigan. “When interest rates rise, it means that investors have to pay more for investments, and it can be difficult to get a profit from them. This can have a negative impact on retirement savings, because the returns may not be as high as before.”
Most retirees accumulate their retirement savings after retirement. This means you use the proceeds or sell some assets to pay for retirement expenses. Rising interest rates, along with record high inflation, represent a double-edged sword.
“If retirees withdraw money from a stock and/or bond portfolio for the desired income (by selling dividends, interest, and some principal), they may have to sell more primary assets at lower prices to maintain the income they previously received. Interest rates will increase,” says Family Financial Planning in Wheaton, Illinois. Service partner Mark D. Kinsella. Therefore, to allow their income to keep pace with price increases, retirees will need to sell more assets to earn enough income to support their livelihoods. Over time, this can wreak havoc on an investment portfolio.”
If you continue to keep your retirement savings in a 401(k) plan or invest in mutual funds that hold bonds (including balanced funds and target date funds), your portfolio will experience the real force of rising interest rates.
“For people with 401(k)s that include mutual funds invested in bonds, rising interest rates can have a negative impact on stock prices and, ultimately, net worth,” says Richard Gardner, the company’s CEO. Modulus in Scottsdale, Arizona.
But the news is not all bad.
“Rising interest rates can cause the share price and net asset value of your mutual funds in your 401(k) plan to decline,” says Steven Holmes, senior investment adviser at iCASH. From Toronto, Canada. “On the other hand, as these funds add new high-paying holdings to their portfolios, their returns may increase over time.”
If you want to stay in the fixed income asset class, the safest strategy you can follow may be to limit your investments to individual bonds and that portfolio.
“For bonds—the thing that most retirees spend their time thinking about—it’s actually pretty simple,” says Rubin Miller, chief investment officer at Outlook Wealth Partners in Austin, Texas. “If you’re investing in investment-grade bonds (which you might be primarily to avoid default risk), then the best rule of thumb is that your holding period should be shorter than your investment horizon. This means that your holdings can be used to buy new high-yielding bonds or private bonds that you own. They have enough time to mature, giving you ample time to recover any paper loss in value, and you can handle this process yourself.
If you’re lucky enough not to sell property to save for a comfortable retirement, the impact of rising prices will be less relevant, at least as far as your portfolio is concerned.
“For retirees who don’t draw income from stock and bond investments, when interest rates rise, the value of the stocks and bonds in the portfolio goes down, and in retrospect, that hurts,” Kinsella says. “However, if the assets are not sold to provide cash to the owner, there is no harm to the investor/owner.”
Increase interest rates keep real estate for personal use or as an investment.
“The biggest risk is that rising interest rates will make it more expensive to borrow money,” says Alex Byder, owner of BD Home Holdings, LLC in Lafayette, Indiana. “For example, if you have a variable rate mortgage, you’re at risk of paying a much higher mortgage payment.”
From an investment perspective, rising interest rates may limit the ability to attract income from real estate holdings. In addition, high mortgage rates create a challenge when trying to sell a property. This applies to seniors who want to move to a smaller home.
“When people have a good retirement portfolio, the only place that can hurt retirees is in their real estate portfolio because few people can afford real estate at high interest rates,” said Omer Reiner, president of FL Cash Home Buyers. LLC in Ft. Lauderdale, Florida. “Many people report that retirees may find it difficult to downsize, but if they sell their home and have a good retirement fund, they should be able to downsize with cash only.”
While rising interest rates affect investments, the impact on all investments is not the same. It makes sense to understand the differences and invest accordingly.