Will Your Rates Move When the Fed Moves?

The last time the U.S. Federal Reserve (Fed) raised interest rates was more than 10 years ago. Now economists expect it will happen again soon. And it’s likely to affect your investments.

When the Fed raises its benchmark interest rates, other interest rates – such as those on home and auto loans, income investments, and credit cards – tend to follow. So if the Fed raises rates this year, as is widely expected by economists, higher rates will ripple through the markets. In just one example, money market fund managers will slowly replace their portfolios with higher-yielding securities – good news for fund holders, as this ultimately will benefit them.

The most significant impact will likely be on your bond investments. The interest rates on bonds with shorter maturities will likely move most; longer-dated bonds will likely be slower to react. But keep in mind the inverse relationship between interest rates and bond prices: as rates rise, bond prices fall. So your bonds could be worth less if you plan to sell them prior to maturity; if you sell at maturity, you will get face value.

That said, there’s time to prepare: For example, consider your credit card debt. Zero percent introductory rates are likely to disappear once the Fed begins raising rates, so if you’re in the market for a low-rate card, you may want to get it now. And, of course, pay it off before the 0% rate expires, as market rates on credit will rise when the Fed moves.

Similarly, it may be wise to stay away from adjustable-rate mortgages. And you may want to review your mutual fund portfolio with your financial advisor. He or she can help you develop a bond strategy, such as bond laddering, which involves purchasing bonds that mature at different times.

You can weather rate changes because – unless the bond issuer defaults – when each bond matures you’ll receive the full principal amount.

Don’t Let Your Emotions Affect Your Investing!

We may not realize it, but many of us are letting our emotions and values play a role when we make investment decisions. And the impact can be significant. Are you an emotional investor? And if so, what can you do about it?

Here’s an example: This investor constantly trades his portfolio. Buying and holding seems boring, so he buys and sells on a whim. It feels fun, but there’s a downside: chances are he’ll likely lose money in the process.

Of course, the opposite is also true. Consider another investor who’s afraid of ending up poor. As a result, she refuses to take even a sensible risk with her portfolio. In the end, she does end up poor, because her investments don’t keep up with inflation.

To avoid emotional investing, it’s important to know your investor persona: What do you really want from your investments? And why do you invest as you do?

For example, many investors tend to hold on too long to a loser. In this case, the underlying emotion may well be pride: Buying a security is a hopeful beginning, and few of us want to admit we’ve made a mistake. So we convince ourselves the investment will make a comeback. But it seldom does.

In the final analysis it’s likely that emotional investing will reduce your profits. Avoid this trap: have a solid financial plan and stick to it. Your advisor can work with you to develop a plan – and help you stay with it.