Presentation on theme: "How Rising Interest Rates Can Affect Your Portfolio Common Sense on Complex Issues."— Presentation transcript:
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 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