When it costs more for businesses to expand (due to the higher cost of borrowing), these businesses likely become less valuable to investors. Because the Fed’s interest rate impacts every loan that happens in the entire country, no business is unaffected. People who are intimately involved in the stock market start to divest themselves of their suddenly devalued dividend potential, and the entire market drops. It doesn’t matter that interest rates are historically low. Any increase hurts stock returns, and thus throws a temporary wrench in the markets.
If you have an IRA or any other investment account, you are feeling the pinch at this moment. So are rich people, like Jeff Bezos. The thing is, the Fed must raise interest rates eventually, and the global market will just have to learn to deal with it. But with so much riding on the Feds’ decisions, and no one wanting to repeat or exceed the Recession of 2008, you can understand why the Fed’s under some pressure right now.
So What Should I Do?
Don’t freak out, please. If all of this comes as a surprise to you, this is an important lesson in the fundamental economics of American investing. And it doesn’t mean that the bottom is going to fall out of your portfolio. Hopefully (and nobody can tell the future, no matter what they might say on the internet) the economy will continue to recover, and the stock market will grow based on internal robustness, not artificial support from the Federal Reserve.
Sensible stock investing should be about the long game, not about blips in the radar.
The Fed will do what it does, and it won’t always be in the best interests of your short term investment interests. The portrayal above is just one little sliver of what the Fed does. But by better understanding it, you’ll be more likely to steer clear of investment fear-mongering, and stay the course to long term investment success!
Based in Keller, Texas, Matthew A. Hayes is a CERTIFIED FINANCIAL PLANNERTM professional providing advisory services to individual families, trusts and businesses. Matt is also leading the way with an innovative 401(k) service called (k)viseTM. Created to provide professional 401(k) planning for companies and their participants, (k)viseTM gives personal assistance in building and managing individual portfolios within a company’s retirement plan. As an independent Financial Planner, he provides clients with honest and unbiased professional guidance.