Spoiler Alert – The Internet Was Wrong About Rising Interest Rates!

Financial Advisor Philadelphia

Not everyone knows where interest rates are going

Interest rates, or more specifically conversations regarding rising interest rates, are common water-cooler talk.

In fact, I rarely have an investment conversation these days that doesn’t include a thorough analysis of the “obvious impending market disaster” surrounding rising interest rates. Experts and nonexperts alike are convinced that 2015 is “the year.” Interest rates are moving up. There is no doubt about it!

That being said, I am not here today to take a side on this issue, but I am here to remind you of one important thing…

No one knows exactly when interest rates will rise (or for that matter, how quickly they will rise, when they will stop rising, how long the rise will last, what the impact will be on other economic indicators, will the rise be linear or will it rise and fall, etc.)

Why do I feel confident saying that? Because we’ve heard this story before. We’ve been hearing this story since at least 2010. Don’t believe me? Maybe a review of some headlines from the past five years will jog your memory.

In 2010—Rising Interest Rates Threaten Value of Bond Holdings

Was it really 5 years ago that the so-called “experts” were discussing the threat of rising interest rates? That seems like a long time ago, but this article from 2010 is proof.

I hate to think about the investors who have been out of the market since 2010. Imagine how many investment opportunities may have been missed after being paralyzed by fear from this “expert” article. The five-year bond return, as measured by the Barclays Aggregate Bond Index, has been 4.41%, while the five-year stock return, as measured by the S&P 500, is 14.47% (periods ending 3/31/2015).

That’s a lot of performance that you might have missed out on.

2011—How Should Bond Fund Investors Prepare for Rising Interest Rates?

If interest rates didn’t rise in 2010, then they’ll surely rise in 2011, right? If you read the article above, then you might believe so. The phrase “sooner or later” was used, as if rising rates were practically inevitable.

Yet, here we are in 2015… I guess “later” was a bit more accurate than “sooner.”

2012—When Mortgage Rates Rise, Will Home Prices Fall?

Notice that the title starts with “when.” “When” mortgage rates rise!

“When” is a very strong word, implying once again, as in 2011, that rising interest rates are a near certainty.

However, as we saw that year, that prediction was another swing and a miss. Strike three, media!

To be fair, the thought of home prices falling (or stagnating) is an interesting discussion that deserves attention. Personally, I find it difficult to believe that making it more expensive to borrow money will not have any impact on the value of home prices.

2013—In a Shift, Interest Rates Are Rising

Definitive! Yes, that’s right. The discussion is no longer about when interest rates will rise. According to this 2013 article, a shift in interest rates is presently occurring!

Even more interesting is this quote from Jamie Dimon, the CEO of JPMorgan Chase, which confirmed the headline: “I think you all should be ready, because rates are going to go up.”

Now, not to be overly harsh, but if Jamie Dimon can’t predict when the rates are going up, what chance do you think everyone else has of predicting it correctly?

2014—What Rising Interest Rates Will Cost You in 2014

What will interest rates cost? Did you find yourself saying something like this in 2014, “Oh my gosh, I need to call my advisor and sell my bonds right away!”

I sure hope not. Do you know what the cost in 2014 was for remaining invested in bonds? Nothing.

In fact, I could argue that it actually cost you more if you listened to this advice and moved your fixed income into cash in 2014. You missed out on the upside market return of fixed income in 2014.

Just another wrong guess at the “impending crisis” first predicted back in 2010!

2015—Good News! Interest Rates Will Likely Rise in 2015!

Is 2015 the year? According to this article in November of 2014, it certainly is. However, so far, the markets wouldn’t suggest that 2015 is any different than previous years. This is probably just one more surefire prediction that has fallen by the wayside.

What’s My Point?

The story of rising interest rates has been a hot topic of conversation for years. This isn’t something new and it certainly isn’t the secret sauce to investment success. It’s simply one piece in the overall investment puzzle.

At some point, it is likely that interest rates will move up. When they do, that shift shouldn’t be the only factor that affects your decision-making. You should consider how fast the increase happens, how long the increase lasts, whether the increase is linear or variable, how the increase will impact other economic factors, and how the increase will affect various asset classes in the fixed income markets.

These and other key factors could impact how rising interest rates may affect your portfolio.

Past performance is no guarantee of future results.  Barclays Aggregate Bond Index is made up of the Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Based Securities Index, including securities that are of investment grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $100 million.   S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market.  Investors cannot invest directly in an index.

Asset allocation and diversification do not guarantee a profit or protect against loss.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities). Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Lower-quality fixed income securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed-income security sold or redeemed prior to maturity may be subject to loss.

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