Interest Rates May Be Falling But Your Net Worth Doesn’t Have To
Written by
Jordan Rosenfeld
Edited by
Rebekah Evans
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One of the upsides of recent high interest rates is that it’s allowed investors to reap significant gains on many types of investments, as well as in accounts like high-yield savings accounts.
With the Federal Reserve Board (also referred to as the Fed) beginning to lower interest rates as inflation has come down, this could also mean a reduction in earnings on investments.
Ted Braun, certified financial planner (CFP) and senior vice president of Wealth Enhancement Group, recommended how to make sure that your net worth doesn’t fall along with interest rates.
Consider the Type of Money You’re Reallocating
The first thing you need to do is consider what type of money you’re looking to reallocate and why.
“Interest rates might be coming down, but they’re not going to fall off a cliff unless we have some kind of economic disaster, which is always possible. So you still can expect to get a pretty decent risk-free rate at around 4.5% to 4.75% for another little bit and still over four into next year,” Braun said.
His question is, if that rate is not good enough, then what risk level are you comfortable with? “Because you could still lock in a Certificate of Deposit (CD) for 12 months or longer and get close to 5% if you really didn’t want to take any risk,” he said.
Braun doesn’t love CDs because they tie up your cash, but if you don’t need access to it anytime soon, it could be a good way to capture that extra interest for a bit longer.
Focus on a Specific Goal
Before you go moving money around, Braun urged that you ask yourself what the specific goal is for your money and your time horizon. “Because that’s going to dictate whether or not you stay in cash, like investments or bonds or the equity markets,” he explained.
Consider Exchange Traded Funds (EFTs)
If you’re willing to take a bit of a financial risk, Braun said, “The Fed cutting rates not during times of economic distress is generally a pretty good buying signal for the equity markets. So I would look at domestic and U.S. large cap ETFs, broad, nothing specifically targeted, but large cap growth.”
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You want to focus on the ETFs with big names and large market cap value. “Again, it is really going to be all based upon the risk you’re willing to take because then you’ve got investment grade bonds, municipal bonds, things like that if you’re a little bit more risk averse,” Braun said.
Considerations for Those Pre-Retirement
If you’re towards the backend of your career and you’re moving more towards retirement, “Why take interest rate risks and investment grade bonds, credit risk, things like that when you can get 5 percent?” Braun explained.
He said this stage of life is the perfect time to start investing in high quality investment grade bonds using mutual funds or ETFs.
“I don’t think there’s any real need to buy individual bonds. Unless you’re a high income earner in a high tax state like California or New York, then you might want to consider a municipal bond ladder for somebody who’s in say, after-tax assets, not in an IRA or 401(k).”
Heading Into Retirement
If you’re nearly in or entering retirement, Braun suggested adding a little bit more interest rate risk. “On the traditional bond side you’ll be able to still collect a good yield,” he said, “but also give yourself an opportunity, grow the asset with a little bit of capital appreciation.”
For Younger Folks
On the younger side, if you’re stashing cash because you’re trying to save for a house or some other type of major purchase, Braun recommended investments that will earn you above 3%. At this stage of life, he said, a CD could make sense because you may not need the funds immediately and the rate being closer to 5% is worth it.
When you don’t need to spend it immediately, he said, “There’s just no need to take extra risks.”
For Brand New Investors
For those really just beginning to work and have enough to save or invest, Braun said they should first emphasize having an emergency fund of several months’ worth of living expenses.
If you have savings above three to six months’ worth, he recommended diversified ETFs. “Give yourself an opportunity to make real long-term money and not just a couple bucks of interest every month.”
Most of all, don’t panic. Slight interest rate changes may not make a huge dent in your investments.
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