Ever think about what the rising interest rates will mean to your portfolio? Keep in mind that last June, the Fed raised key short-term interest rates for the first time in four years. So, what's this all signify?
First of all, remember that when interest rates go up, the value of existing bonds usually comes down. Why? Because bond investors like new bonds issued with higher interest rates which tends to drive down the prices of older, lower-rate bonds. Of course, one should recognize that in the long term, higher interest rates usually help bond fund investors earn higher total returns because bonds with such higher rates provide more interest income than the lower-rated bonds.
Also, when rates rise, there is generally a drop in stock prices. Consider what the Fed is doing. If they raise and lower the target federal funds rate, it is usually to manipulate the economy. If the economy is struggling (which has been the case), the Fed will lower the rates to "loosen" the country's money supply and to stimulate growth. Incidentally, making it less expensive for businesses as well as consumers to borrow and spend encourages growth. Contrarily, higher interest rates tend to dampen spending and service to keep inflation in tow.
One reason stock prices to fall after a rate hike is simply because higher rates make it more expensive for companies to borrow money. My daughter Michele, works at the Fed, as a bank analyst and she tells me that the Fed has initiated nine interest rate hikes since 1970 (excluding the increases during this year). Although each of these rate hikes generally led to a short-term drop in stock prices, those prices on average were up again 12 to 18 months later.
So, what does this all mean? You may be sure that no one can predict the future, but it's vital that you remain focused on your long-term goals and not be overly fixated with short-term market moves.
