One of the top concerns of investors is how interest rates will affect their portfolios. Unfortunately, rates are also hard to predict. Trying to guess what the market will do, as well as the factors that affect it, is a fast way to drive yourself to distraction. Instead of worrying, read on about what we have learned about interest rates and how to give yourself some peace of mind.
Forecasts Are Often Wrong
Although some analysts get it right, those examples are few and far between. According to Hedgeye, an independent investment research company, the Fed forecasts are wrong about 70% of the time. In years past, economists have often predicted rising interest rates. Those predictions have not proven to be accurate. These polls and opinions make for interesting segments for financial reporting. However, it is wise not to attach an emotional component to them. A prediction is just that – a guess.
The High Cost of Expectations
If an expert economist has a hard time predicting what the market will do, your investment adviser does as well. There are many factors that affect interest rates, including inflation, recession and discount rates. These factors are largely out of your control. Expecting an economist or an adviser to know how to consistently and accurately predict what the market will do is setting yourself up for disappointment. A good advisor will help you to understand what you can do to protect yourself in the event of rising rates.
Thinking Long Term
Reducing your risk and protecting your investments is very possible. In a recent report from Barron’s, How to Protect Your Bond Portfolio Against Rising Rates, the author states that certain types of bond investments can shore up against the negative impacts of higher rates. “Researchers have found that, in most cases, such a portfolio’s long-term return will be quite close to its initial interest rate yield, regardless of what interest rates do along the way.” Another alternative is putting cash into a savings account, where it will be safe from dips in the market – it will also only grow if you contribute to it. However, if you go this route, you run the risk of eroding your purchasing power in the long-term (due to inflation).
Although predicting what the market will do accurately is more of a game of chance, investments don’t have to be a gamble. Wise investment choices are the best way to see you reach your retirement goals.