Are High Interest Rates Here to HELP or HURT You?

By Branden DuCharme

You have likely felt the impacts of high inflation. High inflation has led to an increase in interest rates, the results of which you are feeling in different but potentially equally painful ways. Here is the thing: the Fed is adamant about beating down inflation, which means interest rates will continue to rise and will probably stay high for quite a while (my opinion). So the question becomes, will you be wiped out by the increase in interest rates, or will you be laughing all the way to the bank? It’s really for you to decide.

Over the last decade while interest rates stayed near zero, folks were actually needing to take increased risk through more exposure to riskier assets like stocks, real estate, or other high-risk asset classes. Low risk bonds just weren’t yielding a meaningful return that would get people to their goals.

If you have been riding that wave and don’t care to pivot your strategy and change your risk exposure, buckle up. It will continue to be a bumpy ride. Rising interest rates will change what is referred to as the “discount rate.” The discount rate is a key number that is used in a wide range of calculations in order to determine the value of risk assets, such as stocks, real estate, high-yield bonds, or even private businesses. The key thing to remember is that as the discount rate increases, the value of risk assets decreases. This is because investors need to buy at a deeper discount to compensate for the increased risk. They are taking over what is generally referred to as risk-free rates, such as the ten-year treasury notes.

How can higher interest rates help you? Well, for those that manage to appropriately change the risk structure of their portfolios holistically, there may be great opportunities ahead to gain exposure to lower risk markets, such as treasuries or high quality corporate bonds. The difference is that now the lower-risk assets that did not generate a meaningful yield in the past now likely will. This means that as you come closer to retirement or if you enjoy retirement now, you may not need to take the same amount of risk that you have been in order to generate a relatively similar return.

As the discount rate increases, the price of stocks and real estate will likely continue to fall significantly. Historically, because of the liquidity difference, we would see the stock market correct and finish correcting prior to a correction in the housing market. So as the saying goes, cash is king.

There is a lot of talk about the high rate of inflation and the need to make a higher return than the inflation rate. Remember that investing is a long-term strategy and chasing high shortterm gain is often a fool’s errand. Money market funds and short duration treasury bonds (the lowest risk on the yield curve) are now producing a meaningful return. Well-calibrated investors should utilize this to their advantage to help them wait out periods of volatility while the market corrects to reflect the new true value of risk assets.

Speak with your own fiduciary financial advisor to strategize how to win in this rising interest rate environment.

About the Author

Branden DuCharme is an investment adviser representative with GVCM, a SEC registered investment advisory firm and an Accredited Wealth Management Advisor (AWMA®).