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How Will Higher Interest Rates Affect Your Investments?

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How Will Higher Interest Rates Affect Your Investments?

The US Federal Reserve Open Market Committee raised interest rates again last week by a quarter of a percent. How will higher interest rates affect your investments? There are several ways that that higher rates will affect your portfolio both immediately and over the long term. Here are a few thoughts on the subject.

Immediate Effects of Higher Interest Rates on Your Investments
U.S. Treasuries
Corporate Bonds
Dividend Stocks
U.S. Treasuries and Corporate Bonds
If you currently have U.S Treasuries, AA, or AAA corporate bonds in your investment portfolio, they just became a little less valuable when the Fed raised rates last week. And, if the Federal Reserve follows through with its projections and raises rates twice next year, these investment vehicles will become progressively less valuable. However, if you simply hold your bonds or Treasuries to maturity, you will not lose money on these investments. And, if you wait for higher rates, you will be able to purchase these bonds and treasuries and earn higher interest rates. Ideally, you will buy these when rates peak. Then you will be earning a good interest rate and your bonds or treasuries will become more valuable as rates start to fall.

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How Will Higher Interest Rates Affect Your Investments?

  1. 1. HOW WILL HIGHER INTEREST RATES AFFECT YOUR INVESTMENTS? By www.ProfitableInvestingTips.com
  2. 2. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments The US Federal Reserve Open Market Committee raised interest rates again last week by a quarter of a percent.
  3. 3. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments How will higher interest rates affect your investments?
  4. 4. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments There are several ways that that higher rates will affect your portfolio both immediately and over the long term. Here are a few thoughts on the subject.
  5. 5. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Immediate Effects of Higher Interest Rates on Your Investments
  6. 6. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments •U.S. Treasuries •Corporate Bonds •Dividend Stocks
  7. 7. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments U.S. Treasuries and Corporate Bonds
  8. 8. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments If you currently have U.S Treasuries, AA, or AAA corporate bonds in your investment portfolio, they just became a little less valuable when the Fed raised rates last week.
  9. 9. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments And, if the Federal Reserve follows through with its projections and raises rates twice next year, these investment vehicles will become progressively less valuable.
  10. 10. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments However, if you simply hold your bonds or Treasuries to maturity, you will not lose money on these investments.
  11. 11. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments And, if you wait for higher rates, you will be able to purchase these bonds and treasuries and earn higher interest rates.
  12. 12. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Ideally, you will buy these when rates peak.
  13. 13. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Then you will be earning a good interest rate and your bonds or treasuries will become more valuable as rates start to fall.
  14. 14. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Dividend Stocks
  15. 15. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Dividend stocks like utilities are often considered to be proxies for bonds.
  16. 16. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments So, when rates go up but dividends do not, dividend stocks lose value.
  17. 17. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Providing that the basic business of the dividend stock does not change, such as with a utility, these investments will perform like bonds and Treasuries.
  18. 18. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments But, if higher rates usher in a recession, many now-strong dividend stocks may take an earnings hit as well.
  19. 19. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Over the long haul the value of these investments will depend on their intrinsic stock value, in which case the effects of higher interest rates on the general economy will be important.
  20. 20. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Longer Term Effects of Higher Interest Rates on Your Investments
  21. 21. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments CBS News writes that the U.S.’s interest payments are about to skyrocket.
  22. 22. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments This is a big deal because it affects all sectors of the economy, government, and personal finances.
  23. 23. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments A recent Moody’s analysis noted that persistent high debt, among other factors, would lead to “persistent deterioration in the U.S.’s fiscal strength over the next 10 years.”
  24. 24. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments High federal borrowing could also crowd out other types of investment.
  25. 25. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments The federal government borrows money by issuing treasuries; the investors who buy them are effectively lending to the government.
  26. 26. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments A very high supply of treasuries could effectively starve other parts of the economy of investors’ money, some analysts say.
  27. 27. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments “If you issue more and more treasuries, the dollars you use to buy them need to come from somewhere.
  28. 28. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments They could have gone into the stock market, or into other investments,” according to Torsten Slok, chief international economist at Deutsche Bank.
  29. 29. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments In the article they show a graph from the Office of Management and Budget showing the expected huge increase in payments on U.S. debt.
  30. 30. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments As the number of US dollar available for investment dwindles the US will not be the first country affected.
  31. 31. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Emerging markets are already suffering and there is the prospect of massive business failures in China this coming year.
  32. 32. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Despite Trump’s America First rhetoric, this is an interconnected world and trouble offshore will come back to bite the USA in the proverbial backside as well.
  33. 33. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Interest Payments on US Debt
  34. 34. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments The US debt is already huge and due to the Trump tax cuts it is going to be a lot bigger.
  35. 35. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments What is really worrying, however, is the size of the debt compared to the US gross domestic product, GDP.
  36. 36. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments The game plan with recent tax cuts was that the resulting economic stimulus was going to raise GDP above 4%.
  37. 37. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments That has not happened despite lower unemployment rates and, until now, a surging stock market.
  38. 38. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Many point to higher interest rates and their fallout as a reason that the stock market is getting bearish.
  39. 39. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments US Debt and US GDP
  40. 40. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments More Rate Hikes on the Horizon
  41. 41. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Bloomberg writes that we are not going to see the death of rate hikes just yet.
  42. 42. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Money markets appear to have completely nixed the idea of Federal Reserve interest-rate hikes in 2019, although the outlook may not be so simple.
  43. 43. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments As the Fed jacked up rates by a quarter of a percent in their most recent meeting, predictions of no more rate hikes seem to have been more wishful thinking than not.
  44. 44. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments The Fed is famous for thinking long term and is almost continually at odds with the short term political concerns of congress and the U.S. president.
  45. 45. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Too-low interest rates have an effecting of distorting markets.
  46. 46. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Real estate prices escalate because folks can buy more for their dollar due to the lower cost of servicing their debt.
  47. 47. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Investors tend to bid up stock prices and overheat the stock market.
  48. 48. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments As Investopedia notes, the effect of interest rate changes can take up to a year to be felt.
  49. 49. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Interest rates affect the economy by influencing stock and bond interest rates, consumer and business spending, inflation, and recessions.
  50. 50. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments However, it is important to understand that there is generally a 12-month lag in the economy, meaning that it will take at least 12 months for the effects of any increase or decrease in interest rates to be felt.
  51. 51. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments By adjusting the federal funds rate, the Fed helps keep the economy in balance over the long term.
  52. 52. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments However, the stock market continually seeks to predict the course of the economy and the value of investments.
  53. 53. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments And the stock market has been very volatile and in correction mode.
  54. 54. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments How higher interest rates will affect your investments will be largely negative over the short term as rates go up and the costs of borrowing rise.
  55. 55. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Over the longer term the risk is tied to the drag on the US economy and US investor caused by an ever-increasing US debt burden as more and more of the results of US productivity are eating up by servicing the debt.
  56. 56. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Is there a place to hide as this scenario plays itself out?
  57. 57. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments If you like cash positions when the market is volatile, a smart move is to build a “ladder” of short term AA or AAA bonds or US Treasuries.
  58. 58. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments A bank account is also protected by Federal Deposit Insurance.
  59. 59. http://profitableinvestingtips.com/bond-investing/how-will-higher-interest-rates-affect-your-investments Then the issue is predicting a market bottom, providing that there is one as the long term effects of mounting US debt play out.

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