By: Randy Porzel, Senior Advisor at Private Vista
After the Great Recession of 2008, it seemed that every person I met was asking about investing in gold. Then in 2013, when gold prices plummeted over 25% and gas prices held record highs, the conversation shifted to oil investments. Most recently, I’ve been fielding questions on Bitcoin and Cannabis as an investment. Aside from all being very volatile investments, the only constant in each of these conversations was the follow up question, “How will a change in interest rates affect me and my portfolio?”
With interest rates still near their record lows, consumers have been borrowing money for school, homes, and cars near or under 4%. Considering that the average mortgage rate in the 1980’s was 12.70%, people have been able to borrow more money than ever at these historically low rates.
With the Federal Reserve signaling two additional interest rate increases this year, this favorable borrowing environment is expected to become less attractive for consumers. For example, a person with a monthly mortgage budget of $2,500 may be able to afford a 30 year mortgage of $520,000 at a 4% interest rate. As rates increase to 5%, that same budget can afford a mortgage of only $465,000 – and at 6%, only $415,000. The Fed is aware of this effect on the real estate market, which is one reason why they have been slow to raise rates.
Since rates peaked in the 1980’s, conservative investors with heavy fixed income portfolios have been beneficiaries of a falling interest rate environment. As interest rates have decreased, these bond investors have continued to collect their interest while also benefiting from an increase in the bond’s price, since the two are inversely related.
Looking ahead to the next 5-10 years, it is clear that this trend will come to an end. Not only should investors expect to earn low yields – as they have for the past decade – but they could experience a loss in their bond price if they choose to sell prematurely. This is primarily why many bond mutual funds and ETF’s are experiencing negative returns this year.
To protect your portfolio against rising interest rates, consider discussing alternative investment options with your financial advisor. The goal would be to shift interest rate sensitive investments towards other options with a similar risk profile, yet are less affected by an increase in interest rates. Some examples of investments in this space could be: Reinsurance, International Lending, Short-Term Lending, Business/Real Estate Lending, Student Loan Financing, and/or Floating Rate Bond Investing.
Overall, the future of investing in Bitcoin and Cannabis remains unclear but looks to remain volatile in the short term. Interest rates will inevitably continue to rise, so prepare your portfolio accordingly so you can meet your long term financial goals.
Any questions? Reach out to Randy Porzel.
The views expressed represent the opinions of Private Vista, LLC and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
Additional information, including management fees and expenses, is provided on Private Vista, LLC’s Form ADV Part 2, which is available upon request.