Rates are rising and I am rethinking all my money decisions
Rising interest rates have caused some to rethink how they plan to spend, invest and save going forward. After many years of low interest rates, the strategies that worked well in the past, like variable mortgage rates, should be re-examined. Previously, the only way to earn a decent interest rate was to invest in financial markets and take on increased risks. Investors may soon be able to look at savings accounts, but you’ll need to shop around for the best rates. Higher rates should also lead to different investment strategies due to increased corporate earnings and the effects of rates on certain industries. For fixed income, like bonds, a shorter maturity may make more sense especially if you need to sell before they mature. After living in a near-zero rate environment, we’ll need to make adjustments for a rising rate one.
Key Takeaways:
- In a low rate environment, the only way to earn money was to invest in financial markets, which comes with added risks.
- Better growth tends to increase the number of jobs, improve wages and consumer confidence, but also inflation, which can lead to even higher rates.
- Rising rates can cause valuations (measured by price-to-earnings multiples) to fall, which is why sectors like utilities or real estate, which are thought of as bond substitutes, tend do poorly when rates rise.
“We’ve never been in this kind of ultra-low rate environment before, which means we’ve never been in this kind of rising rate environment, either. It’s important to remember that the reason rates are rising, not just here, but around the world, is that the global economy is improving.”