Finance “What if interest rates go up?” If you’ve been reading the business pages (either in print or online) over the past several months, you’ve likely read a lot about interest rates. And for good reason. Interest rates (essentially the cost to “rent” money for a given time) have a direct and powerful impact on the price of most assets. After a long period of exceptionally low rates, they look to be creeping back up. And that could pose a risk to your portfolio: if rates rise too far, too fast, they can put a damper on business growth (which affects stock prices) and push the value of bonds down. Interest rates are also important to anyone who borrows money – whether it’s via a mortgage, a credit card, a car loan or other borrowing. Again, if rates go up too far, too fast, it can mean paying a lot more for servicing debt, which could leave you with less money for everything else. What can you do about it? Start by asking yourself: what if interest rates rose by an additional 1%, 2% or more over the next year or so? Could you still afford to service your debt(s) without impacting your lifestyle? Next, take a look at your portfolio: which holdings could be impacted by rising rates? Real estate (including REITs), utilities and financials are areas to pay attention to here. Finally, take a look at your bond portfolio. How exposed are you to long-term bonds (i.e. three years or longer) – these are the ones which will be hit hardest if rates rise quickly. “What if inflation rises?” Inflation is the gradual, steady increase in the price of goods and services over time. As such, it’s one of the most significant financial risks that we face. In Canada, inflation is relatively benign right now – just over 2%. South of the border, it’s a bit of a different story, with inflation at 2.9%, close to its historic average. Will it go higher? It’s tough to say. But even if it doesn’t, over the course of a 20- or 30-year retirement, inflation can seriously erode your ability to pay for life goals, as well as everyday expenses. That’s why it makes sense to plan for it. What if inflation does rise – do your retirement income and withdrawal projections still work? Do you have an appropriate allocation to investments that can rise in value alongside inflation? Dividend-paying stocks and inflation-protected securities (such as floating rate bonds) can fit the bill here. “What ifs” you should always be asking The following questions are perennial investor concerns. And they’re particularly important questions to ask now, as the current bull market gets long in the tooth. CSANews | FALL 2018 | 31
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