Rising Rates Dangerous?

For a few years now financial “experts” have been warning us that interest rates would rise as the U.S. economy improves. Like a stopped clock, eventually they will be right, we just don’t know when. But are rising interest rates the disaster that many fear?

If you own long-term rate interest-sensitive securities, like 20 or 30 year bonds or other securities like some real estate partnerships, rising rates could cause big declines in the value of your investment. But those who own shorter-term securities through mutual funds should experience gentler declines and a gradual increase in income as bonds mature and the proceeds are reinvested in new, higher interest bonds.

As for the fear that rising rates will negatively impact stock prices, remember that stocks don’t trade in an information vacuum. As expectations change stock prices adjust in anticipation. A recent article in the Wall Street Journal explored the past performance of stocks in periods of rising rates and found few reasons to be fearful

One study found that, since the Standard & Poor’s 500 was created in 1957, the index has only lost value in two of the 14 periods during which the Federal Reserve raised short-term interest rates. In fact, the last time the Fed boosted rates, between late 2003 and mid-2007, the S&P 500 gained almost 47%.

Predicting the future is hard and acting on others predictions has proven dangerous time an time again. Ignore the steady drumbeat of fear mongering that is meant to provoke you into moving your money from one place to another (moving money is Wall Street’s primary path to profits). Relax, diversify properly, and let the gamblers play with their money, not yours.

Read the Wall Street Journal article subscription may be required

Don McDonaldComment