HIGH RATES: INVESTMENT BENEFITS AND LOSSES
In December last year, the Federal Open Market Committee has hiked interest rates and have raised them again the previous month. Moreover, Fed's chair Janet Yellen hinted that these increases may prevail this 2017. But how will this affect advisors, clients, and portfolios?
A surging interest percentage will result to a bond prices decline. Typically, analysts forecast equities to be negatively impacted when rates go up, like what they expected for the markets in 2016 but surprisingly, the value of equities did not suffer,which is in contrast with what they are expecting. However, there is no certainty in how long will this trend prevail.
Given this, the recent growth in stock markets are widely speculated to be the outcome of a boost in spending and planned tax cuts by the US chief. A sudden fluctuation in the market due to present political or economic state is often followed by a correction. This is a reverse shift by a stock, commodity, or bond by 10% to cope with an overvaluation., which is the main reason why investors should ask for a financial advisor's assistance in making decisions to avoid acting based on feeling, regardless of where his portfolio is more inclined.
While consultants do not have an accurate prediction of where the stock market is headed, they can take initiatives to make sure their clients make the most out of a future interest hike, while considering potential risks on an account at the same time.
Simply put, during a declining rate, it is best for an asset allocation to be 60% comprised of fixed income and 40% equity to benefit from the rising bond costs. Meanwhile, in a rising rate condition, the percentages will be reversed, in order to take advantage of bullish equities. This way, an individual's risk tolerance remains intact with only a few adjustments.
What about Forex?
A properly diversified portfolio can handle both foreign and local investments but how does a boost in rates affect their exchanges? A US dollar is stronger if for example $1 is equal to $1.35 Canadian dollars, hence this is a warning that it is not wise to exchange Canadian cash to US currency because they will only get $0.65 USD for each dollar swapped. On the other hand, this is a perfect time for Americans to take advantage of the exchange while their greenback is strong.
When you make investments in currencies of other nations, the same rule of buying high and selling low are in place. Although a surging interest level usually helps strengthen a certain currency, this is now always the case since Fed’s latest raise caused a slide.
Targeting long-term goals such as retirement, short-term alterations should be kept at bay. As long as your portfolio holdings are in line with your objectives and risk level, there is no need for a constant selling and purchase. Timing movements during uncertain periods is always a dangerous strategy.
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