Last month the Federal Reserve (FED) raised interest rates for the first time in almost 10 years. Leading up to and following the interest rate increase, the stock market has been very volatile. Interest rates increases along with volatile markets can create timidity among investors.
Historically speaking, once the FED decides to raise interest rates, they usually continue to rise in the months following. The realization that interest rates are going to keep rising can very easily scare the investing public. With higher rates, some investment products are going to be more sought after than others.
For example, bonds and U.S. Treasury products will become more popular among investors because the interest payments received from bonds will increase. However, stocks, which have been the best hedge against inflation, lose much of their purchasing power because returns from your stock investments could exceed inflation. Due to these variables, a combination of stocks and bonds should always be present in your portfolio.
Additionally, interest rates on loans will probably increase. If you want to buy a house or new car, a rise in interest rates will most likely mean a rise in the interest rates on those loans.
There is a benefit, however. There is now a possibility that your bank products (savings accounts, CDs, etc.) will have a higher interest rate. Instead of making the abysmally low return rate of the last few years, your interest on your savings account or CD could increase.
Historically, the two years that follow a rate increase have been good for investors and the stock market. It seems, for the time being, that more interest rate increases are in our future. There are advantages and disadvantages to an increase, and being able to plan for these kinds of situations is crucial. Consult with your financial advisor to discuss your options.