Should Interest Rates Dictate How You Invest?
Rising interest rates can create stress for you as an investor, especially if you are carrying a high debt load. However, it is important to not let changing interest rates deter you from your long-term investment strategy.
A well-executed financial plan that stays on course is more valuable than a constantly changing investment strategy.
Understanding the relationship between interest rates and investment returns may help relieve much of your stress.
Effect on Savings Accounts and Guaranteed Investment Certificates (GICs)
When interest rates increase so do the rates offered by banks for your savings account deposits and investments in GICs (although these are locked in for a specified period). The financial institutions would like more of your money so that they may lend it to their borrowing clientele at higher rates.
Effect on Bonds
Bond prices have an inverse relationship to interest rates. When interest rates go up, bond prices go down. When interest rates go down, bond prices go up.
Effect on Stocks
When interest rates rise, the stock market may decline as the cost of money to companies is increasing and therefore limits growth. Many stocks are not directly affected by interest rate changes, although some specific sectors may benefit from rising or declining rates. Unfortunately, many investors are tempted to chase better returns by trying to time which sectors or stocks will benefit from interest rate movements and this does not usually turn out well.
Effect on Debts
As interest rates rise, the cost of servicing debts such as credit cards, auto loans, and mortgages increases. This can affect the regular amount that you may usually allocate for investments. However, in a rising rate environment, it is usually prudent to pay down debt with the highest interest rate as quickly as possible.
Conclusion
Should interest rates dictate how you invest? The answer is no. You should invest the same way you always invest, as long as you have a long-term investment plan in place. Your commitment to this long-term plan should not be swayed by temporary changes to the interest rate environment.
How Bloom Investment Counsel Can Help You Stick to Your Long-Term Plan
Holding a diversified portfolio of stocks with an investment manager such as Bloom Investment Counsel is better than trying to chase gains by trading your portfolio in anticipation of interest rate changes. For over 25 years, Bloom has specialized in one thing and strives to be the best at it—investing in income-generating investments, specifically dividend-paying stocks, which can help you generate income if needed, and growth from investing in the stock market with a diversified portfolio of stocks.
Established in 1985, Bloom Investment Counsel, Inc. is a Toronto-based independent, privately-owned boutique investment management firm with experience in managing in excess of $2.5B in assets over the years.
We provide actively managed, customized Canadian and U.S. dividend-paying portfolios for wealthy individuals, family offices, foundations, corporations, institutions, and trusts.
Are you looking for a personal investment management service that can help you generate income, if needed, and growth? Let’s Talk. Call us at +1-416-861-9941 or email us at info@bloominvestmentcounsel.com
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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.