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  • Writer's pictureDavid Born

Orinda News: Why Rates Should Interest Investors

The Federal Reserve has begun raising interest rates to tame inflation. By setting the price of money at higher interest rates, the Fed hopes the price of everything else will stop going up so much.

This has a broad impact on your portfolio.

Higher interest rates make investments go down today so that new buyers can expect higher returns going forward. A better price for a buyer today means better returns tomorrow. The “better price today” means lower prices of stocks, bonds, real estate, and any asset providing a return that has to compete with interest rates...

Some parts of your portfolio will also be hit by the economy-slowing effects of interest rates.

All else being equal that should reduce inflation by broadly reducing demand for goods and services. Less demand means less business, and that is bad for your 401k.

This one-two punch combination is what has led to the worst first half for stocks since 1970. But that record overly dramatizes the damage done to stocks so far because the market happened to top out just as the calendar changed. There have actually been five years with bigger drops in the S&P 500 since just 2000. The average intra-year decline during that time is not too far off at 16%.

Rather, what makes the investor pain in 2022 exceptional relates back to the direct impact of interest rates on all investments. Most of the time, bonds maintain their value or even increase when stocks fall, but not this year. The low starting level of interest rates has made the decline in prices particularly painful for bond investors...

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