The possible implications of this rate increase are widespread, from increased borrowing costs for business owners and new mortgage applicants to increased risks for bond and stockportfolios for investors. Young professionals to retirees may have to adjust to a new environment, the likes of which have not been experienced in decades.
Today’s Investors Are More Astute
After meeting with many clients over the course of my career, I’ve found that each person’s investment approach and appetite for risk is as unique as their thumbprint. Everyone, however, is concerned with avoiding the pain of the major market crises we saw in 2000 and 2008.
I’ve also noted that the typical investor is more financially astute and engaged than in the past. This may be because of the impact of a past financial crisis, in which many lost significant portions of their portfolios. Such a negative experience served as a powerful wake-up call. In response, some investors took drastic measures, such as getting out of the stock market altogether and moving investments to real estate, bonds or cash. Others stayed the course. Almost everyone, however, began paying more attention to economic and market trends.
Even the most sophisticated investor has trouble making sense of an economy that seems to be disconnected from traditional benchmarks such as job participation metrics and corporate profits. Furthermore, some investors in the past might have considered bonds to be a suitable option to seek principal preservation while generating sufficient current income. However, pursuing these goals is increasingly difficult in today’s rate environment, when yields are at historic lows. After recent performance of the stock market and current bond yields, and as bond yields approach rock bottom, some want to look beyond the traditional portfolio mix of stocks and bonds.
These concerns lead us back to the interest rate question. With interest rates expected to rise at some point in the not-too-distant future, some investors are considering alternative investment strategies. These include certain types of actively managed portfolios that used to be the purview of institutions but, because of recent regulatory changes, are opening up to individual investors.
One example is a market neutral strategy, the intent of which is to provide a reasonable return while managing potential volatility. Simply put, this strategy takes a “long” position in stocks or bonds that are expected to appreciate and a “short” position in stocks or bonds that are expected to decline. By going “long” and “short”, the managers can focus on security selection and worry less about equity market risk, interest rate risk, and overall market swings. These strategies provide an alternative to the “long-only” approach of equity funds or a broad portfolio consisting of diversified stocks and bonds representing domestic and global markets. A market neutral approach, like all non-traditional strategies, requires active professional management. While not for everyone, such a strategy provides another option investors have in anticipation of rising interest rates. Again, like a thumbprint, each person’s investment profile is unique. It is important to remain diversified and engaged. However, a truly prudent investor must be adaptive to ever changing market conditions.
As published in the Lehigh Valley Business Journal, June 29, 2015
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. The investment products sold through LPL Financial are not insured Tompkins Trust Company deposits and are not FDIC insured. These products are not obligations of Tompkins Trust Company and are not endorsed, recommended or guaranteed by Tompkins Trust Company or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.
Investing involves risk including loss of principal.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
No strategy assures success or protects against loss.
Past performance is no guarantee of future results. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity.
Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.