While you may not be a financial planner by profession, if you’re reading this it means you likely have a plan and are actively monitoring it. A financial plan by its very nature is dynamic, and, as the factors surrounding you change, your plan should change too. The Federal Reserve is trying to cool the economy (see Why Disciplined Long-Term Investors Will Survive This Economic Cycle for more on the Fed and a great economics breakdown), and it’s impacting one of those factors within your plan.
So, as a planner, what should you do? The first thing almost all planners go to when interest rates are rising is anything tied to rates.
- Mortgages – Rates have been low for more than a decade, and hopefully in that time you were able to refinance or purchased a new home and did so with a fixed-rate mortgage. From a historical perspective, rates are still relatively low. If you’re currently looking for a new home and will be financing the purchase, in most cases you should do so with a fixed-rate mortgage.
- Credit Cards – The rates on credit cards can be epically high, but did you know they’re also variable? This means those epically high rates can go even higher. If you’ve been carrying a balance on a credit card (which isn’t recommended), it’s time to pay it down.
- CDs – If you have a certificate of deposit (also known as a CD) at a bank, it may make sense to redeem that CD early, take the penalty and invest that money at a higher rate, given how quickly rates have been going up.
- Bonds – When interest rates go up, the price of a bond decreases due to it being less attractive to another buyer. If you held a bond and wanted to sell it, the purchaser would be willing to pay less, as he or she could go purchase a newly issued bond yielding a higher rate. In our portfolios, we use short- to intermediate-term bonds to protect against pricing fluctuations. The entire bond market is down year to date, but to a much lesser degree in shorter-duration bonds than in their longer-term counterparts.
The above examples are more defensive or reactive moves. So, what can a great planner do to capitalize on rising rates and go on the offensive?
- If you have cash and have been waiting for an opportunity to enter the market, that opportunity is now. We don’t know where the market is going from here in the short term, but in the long term it’s extremely likely to go on to new highs. Really this bullet is relevant at any point within a market cycle, but it’s particularly so right now.
- Rising rates are one factor currently impacting market volatility. And volatility can present an opportunity to engage in tax-loss harvesting. Tax-loss harvesting is the practice of selling a security that is down and immediately repurchasing another position that should perform similarly to the one sold over the long term. This practice recognizes a loss for tax purposes, and the repurchased investment continues to grow at a similar pace long term.
- Be diligent in your plan. You’ve planned for the long-term — now stick to it! The news is constantly reporting on how bad things are today but makes no mention of how great they’ll be tomorrow. That’s why having a plan can make it easier to get through a down market — it helps you keep perspective. An explorer wouldn’t set sail without charting a course, and a disciplined investor shouldn’t invest without a plan.
- If you don’t currently have a financial plan, now is a great time to put one together. A comprehensive plan considers the appropriate portfolio, savings goals, insurance, estate planning and so much more. This is a great opportunity to take action and put a plan together.
You may not know how to maintain your dynamic plan through rising rates, and that’s okay. We’re here to support you throughout your journey, and we can help update your plan as needed. A proactive approach has a meaningful impact long term, and we at Creative Planning are here to take action when necessary. Whether it’s interest rates, a life cycle event or another factor impacting your plan, we’ll be here to help you through it all.