With interest rates in the U.S. remaining low for the past several years, there are some people who are worried what a potential rate hike by the Federal Reserve policymakers might do to the world’s markets. It’s hard to say with certainty what would happen – that would depend on several factors, and the severity of the factors being implemented. Let’s take a look at what realistically might occur:
- The Fed could raise interest rates slightly, and the world’s investment markets will probably overreact negatively at first, then correct themselves shortly thereafter (sort of like the “Brexit” overreaction we just witnessed?)
- The Fed could raise interest rates slightly, and the world’s investment markets won’t react much at all, as it’s been quite some time since a rate hike has happened (making it overdue to happen quite honestly)
- The Fed doesn’t raise rates at all, and the markets are relieved. A slight rally occurs, but that’s about it
- The Fed doesn’t raise rates at all, and the markets move slightly negatively (or barely react at all) since there’s an expectation that a rate hike should be coming in the U.S. with our continued improving economic data
- The Fed raises rates significantly (this is more unlikely than the scenarios above), and the world’s investment markets will probably overreact negatively, then correct themselves several months to a year (or more) later
- The Fed raises rates significantly (this is more unlikely than the scenarios above), and the world’s investment markets react very negatively at first, then don’t move much over the course of the next few months/year (or more)
Out of all of those scenarios, the last two occurring seem most unrealistic at this time because of the worry about what a significant rate hike might due to the world’s markets. Any of the first 4 scenarios could realistically happen, and most people want to know this one thing: Should I be worried about my investments if there is/isn’t a Federal Reserve rate hike? Well, that depends on what your investment goals are with regards to your particular financial situation.
- If you’ve got more than 5 years to remain invested towards your goals, then this shouldn’t anything more than a “blip” on your investment timeline; remain invested
- If your investment timeframe is less than 5 years, you might be tempted to think about getting out of your “riskier” equity investments, but history has taught us that most investors sell when they should buy AND buy when they should sell (emotions can and have ruined the best of investment plans over the course of market history); remain invested
So what should most of you do? Relax – take a deep breath and realize that it’s usually okay to ride out almost any worrisome market “event” if you have time on your side. Realize that – at some point in the future – the Fed will eventually raise rates (they can’t stay this low forever). Whatever the Fed decides to do re: interest rates, you should look for any opportunities (if the markets overreact very negatively) to add to your portfolio when prices are more attractive (buy low, anyone?). Stay the course, and don’t sell everything that’s equity-related (almost always a big mistake) – you’ll be glad that you did!
Don’t be in that group that makes emotional investment decisions – now that you’re armed with this knowledge, take advantage of it and your financial situation as well…you’re welcome!
Find an experienced financial advisor who regularly advises clients to not worry about things they can’t control, works for an RIA firm, earns his/her money from fees (NOT commissions), believes in having an abundance of investment choices for clients, and has the heart & demeanor of a teacher, NOT a salesman, and chances are you’ve found the right financial advisor to help you prepare and plan for your financial goals.
To learn more about Martin Federici, view his Paladin Registry research report.
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