CSANews 102

GETTING READY FOR RISING RATES How to protect your portfolio (and seize opportunities) in a rising interest-rate environment Finance By James Dolan What are interest rates, and why do they matter? First, a refresher on why interest rates are such an important economic indicator. Interest rates measure the cost of money – that is, how much it would cost someone to “rent” a sum of money from someone else for a year (because that’s essentially what a loan is). There are many different interest rates that measure the cost of “money rental” in many different contexts (how much to take out a mortgage; how much to take out a car loan; how much to use a credit card; etc.). But the most important of these is the interest rate set by the federal government via its central bank. This is the rate which the central bank charges commercial banks and other financial institutions which, in turn, forms the foundation of the “prime rate,” the interest rate which those banks charge to their best customers (hopefully, that’s you). The central bank uses interest rate fluctuations to control certain aspects of a nation’s economy. Want to encourage economic growth? Lower rates so that businesses will find it cheap to borrow money and expand, and consumers will borrow to spend. All that spending should (in theory) create more jobs. Is the economy growing too quickly? Raise rates and make it more expensive to borrow, which should (again, in theory) temper both the strength and the pace of economic expansion. This is a very simplified explanation for why interest rates matter so much – because they have the potential to affect nearly every part of a country’s economy. And if the economy is large enough (as it is in the U.S.), those rates have the potential to affect the entire world. That’s why the Federal Reserve’s move in December was so important – because it may end up being the most important financial event of the past 36 years. Thirty-six years is a long time. In the financial world, it’s an eternity. That’s approximately the length of time since investors have had to deal with a rising interest-rate environment. Sure, rates have “spiked” several times along the way (in 1990, 1994 and 2007). But the long-term trend has been steadily down, down, down. That’s about to change. Late last year, the U.S. Federal Reserve raised its trend-setting interest rate – only the second time it has done so since the 2008 financial meltdown. Perhaps more important, it signalled its intention to continue to raise rates in the months to come. Needless to say, the financial world took notice. While rising rates aren’t the end of the world, they do present investors with a very different set of macroeconomic circumstances to deal with. In much the same way as you change your coat depending on the weather forecast, it may be time to change your portfolio and prepare for the changing environment. 28 | www.snowbirds.org

RkJQdWJsaXNoZXIy MzMzNzMx