Transcript How Rising Interest Rates Can Affect Your Portfolio

How Rising Interest Rates
Can Affect Your Portfolio
Common Sense on Complex
Issues
Have you ever wondered about
where all the change comes from?
• Sometimes people see themselves as a
gear in a never ending process. Things
are interrelated and understanding how
things connect can be a good thing.
Interest rates, inflation and the
world’s economy are all connected
• People use money as a medium of exchange for goods
and services. The cost of borrowing that money is
generally dependent on how the people loaning the
money out feel about their chances of seeing their
money again. The sooner they see their money
(principal) and a return on it (interest), the more likely
they will loan it out for a better rate. The more people
looking for loans the higher the cost of borrowing. It is in
the governments best interest to have modest interest
and modest inflation so that it can pay back what it owes
with cheaper dollars down the road. Our government
uses the “Fed” or Federal Reserve bank as one arm to
control fiscal or monetary policy.
Interest rates, inflation and the
world’s economy are all connected
• If the United States has a
“Strong Dollar policy”, it
buys more overseas. If
our dollar weakens, it
makes our products cost
less for other countries to
buy our products and
their products cost more
over here. If we consider
the world one large
shopping mall, many of
the places to shop are not
located in our country.
Inflation
• Think of the cost of a
postage stamp from the
late 1950’s or early
1960’s. It cost around a
nickel to mail a letter back
then. What does it cost to
mail the same letter
today? It is not that it
costs more…It is that the
dollar doesn’t generally
buy as much mail
delivery, gasoline, bread,
house, car as it did after
inflation.
Inflation
• In some areas, the prices
for products and services
seem to inflate more
quickly like in education
and health care. While in
other sectors such as
computers or phone calls
(telecommunications) the
costs seem to decrease
due to efficiencies in
production or technology.
Inflation and Interest Rates
• So while the cost of the postage stamp
may have risen 7 or 8 fold over 4 or 5
decades, the cost of the long distance
phone call or a hand calculator has
decreased multifold. The reason generally
interest rise is the Government wanting to
keep the economy from overheating so
that it moves along at a steady clip. They
do this by controlling what companies pay
to borrow cash to expand their operations.
The affects on your portfolio
• Ask anyone living on a
fixed income what life is
like when they have to
make choices and they
will tell you what is the
definition of frustration.
• Rising interest rates and
inflation are hidden costs
on your money. They
cripple your purchasing
power and eat away at
your savings.
The affects on your portfolio
• If you have longer
term bonds, both the
current income and
principal, you
ultimately receive is
worth less than you
originally anticipated.
It is sort of like having
a ticking time bomb
sitting in the middle of
your plans.
Rising Rates and Inflation
• Some people have traditionally
looked at Real Estate and
Physical Assets like Precious
Metals as hedges to Inflation.
They feel that owning
something that will appreciate
over time may be the best
answer to the issue. A
combination of these and
ownership in a diverse portfolio
of the finest businesses from
around the globe have proven
to be a better place to protect
yourself for the long run. That
is why people put their money
in the stock market!
There are many types of products out that
may help you fight inflation and rising rates
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Adjustable Rate Instruments
World Dollar Denomination Bonds
High Income (junk bond) Bonds
Real Estate Investment Trusts
Foreign Preferred Stocks
Domestic Growth Stocks
Master Limited Partnerships in Energy or Natural
Resources.
• Precious Metals
The world is getting to be a smaller place. Your neighborhood is really
the area you can get to within 24 hours and today that is just about
anywhere. Opportunity abound for those willing to stretch their
imaginations and reframe the contexts of their portfolios