How To Get Ready For Higher Interest Rates
Put away the tarot cards and stop reading the tea leaves.
It's time to cue the theme music from "Jaws" instead.
Months and years of speculation and trepidation are over. Higher interest rates are almost here.
Like a leviathan preparing to emerge from the deep, this is one decision that promises to create plenty of waves and ripples.
Here's the question: Are you ready to ride it out and work it to your benefit?
The impending rate hike
The finance world has been hanging on the every word of Fed officials for years. Parsing their intent. Searching for context clues. Trying to divine the timing of the next rate hike.
A recent policy statement from the Fed gave us an answer. It provided the groundwork for a hike this year.
The decision could come as early as a scheduled meeting of the Fed in April or June. It's more likely, however, to come in September.
The U.S. economy has had mixed growth in the first quarter. With the oil market struggling, the Fed may want to let the economy to gather a bit of steam.
This year's expected hike would be the first since 2006. Rates currently are hovering near zero.
This state of affairs has been a great short-term plus for the economy. It's also been a huge boon for the stock market.
It's been so positive, in fact, that nobody is really sure what kind of effect a rate hike will have.
It might be a blip. It might be a significant problem. Or it might cause unexpected chaos.
For most of us, the reaction will be far more predictable. If you're carrying significant debt, you're going to be paying more to service it. If you're on a fixed income, however, higher rates mean better returns from savings accounts and other interest-rate driven options.
Handling the hike like a pro
It's been so long since we've had an interest rate hike, many investors have likely forgotten how to respond.
There are some battle-tested tactics to employ in this sort of environment.
First off, let's look at real estate. Companies in this sector typically benefit from a higher-rate environment. Home builders, construction firms and assorted businesses are smart bets.
Support companies that derive much of their business from this sector are also attractive propositions. The cost of raw materials often declines during a higher-rate climate. Firms that buy large quantities of raw materials are likely to see a bottom line benefit.
Gold and other precious metals typically thrive in a low rate enviroment. Higher rates act as a brake on inflation, so precious metals are likely to take a hit.
The U.S. dollar has been on a major roll recently. When interest rates rise, the dollar will get another boost. Higher interest rates draw foreign investment. If you haven't beefed up your position in the area, now is the time to do so.
Likewise, if you have the ability to lock in your mortgage at today's rock bottom rates, you'd be negligent not to do so. In ten years we may look back on today as the golden age of interest rates. Unless you like giving away your hard-earned money, lock it in. That goes for all your debts -- not just your mortgage.
Our extended low interest rate climate has lulled us into thinking this is the norm. It's not. The policy of quantitative easing has kept the cost of loans artificially low.
The good times are about to end. If you've been putting off financing a major purchase, hesitate no longer.
On the flipside, now is not the time to lock in to any long-term certificate of deposit. Rates will be much more appealing in a matter of months. Your savings account may get a nice little bump when rates increase.
Finally, the stock market's reaction to the Fed's decision is entirely unpredictable. A rate hike sometimes increases bond yields. Consider laddering bonds or keeping terms relatively short. That way you may benefit from higher rates as your bonds mature.
Like death and taxes, higher interest rates are unavoidable. Yet with a little smart planning and anticipation, this is one change you can turn to your advantage.