• Investing
  • Stock
Round Table Thoughts
  • Economy
  • Editor’s Pick
Home Editor's Pick How investors can prepare for lower interest rates: It’s ‘like getting a haircut,’ advisor says
Editor's Pick

How investors can prepare for lower interest rates: It’s ‘like getting a haircut,’ advisor says

by August 24, 2024
by August 24, 2024 0 comment
Share
0
FacebookTwitterPinterestWhatsapp

Federal Reserve chair Jerome Powell on Friday gave the clearest indication yet that the central bank is likely to start cutting interest rates, which are currently at their highest level in two decades.

If a rate cut comes in September, as experts expect, it would be the first time officials have trimmed rates in over four years, when they slashed them to near zero at the beginning of the Covid-19 pandemic. 

Investors may be wondering what to do at the precipice of this policy shift.

Those who are already well diversified likely don’t need to do much right now, according to financial advisors on CNBC’s Advisor Council.

“For most people, this is welcome news, but it doesn’t mean we make big changes,” said Winnie Sun, co-founder and managing director of Sun Group Wealth Partners, based in Irvine, California.

“It’s kind of like getting a haircut: We’re doing small trims here and there,” she said.

Many long-term investors may not need to do anything at all — like those holding most or all of their assets in a target-date fund via their 401(k) plan, for example, advisors said.

Such funds are overseen by professional asset managers equipped to make the necessary tweaks for you.

“They’re doing it behind the scenes on your behalf,” said Lee Baker, a certified financial planner and founder of Claris Financial Advisors, based in Atlanta.

That said, there are some adjustments that more-hands-on investors can consider.

Largely, those tweaks would apply to cash and fixed income holdings, and perhaps to the types of stocks in one’s portfolio, advisors said.

In his keynote address on Friday at the Fed’s annual retreat in Jackson Hole, Wyoming, Powell said that “the time has come” for interest-rate policy to adjust.

That proclamation comes as inflation has fallen significantly from its pandemic-era peak in mid-2022. And the labor market, though still relatively healthy, has hinted at signs of weakness. Lowering rates would take some pressure off the U.S. economy.

The Fed will likely be choosing between a 0.25 and 0.50 percentage-point cut at its next policy meeting in September, Stephen Brown, deputy chief North America economist at Capital Economics wrote in a note Friday.

Lower interest rates are “generally positive for stocks,” said Marguerita Cheng, a CFP and chief executive of Blue Ocean Global Wealth, based in Gaithersburg, Maryland. Businesses may feel more comfortable expanding if borrowing costs are lower, for example, she said.

But uncertainty around the number of future rate cuts, as well as their size and pace, mean investors shouldn’t make wholesale changes to their portfolios as a knee-jerk reaction to Powell’s proclamation, advisors said.

“Things can change,” Sun said.

Importantly, Powell didn’t commit to lowering rates, saying the trajectory depends on “incoming data, the evolving outlook, and the balance of risks.”

Falling interest rates generally means investors can expect lower returns on their “safer” money, advisors said.

This would include holdings with relatively low risk, like cash held in savings accounts, money market funds or certificates of deposit, and money in shorter-term bonds.

High interest rates have meant investors enjoyed fairly lofty returns on these lower-risk holdings.

It’s kind of like getting a haircut: We’re doing small trims here and there.

However, such returns are expected to fall alongside declining interest rates, advisors said. They generally recommend locking in high guaranteed rates on cash now while they’re still available.

“It’s probably a good time for people who are thinking about buying CDs at the bank to lock in the higher rates for the next 12 months,” said Ted Jenkin, a CFP and the CEO and founder of oXYGen Financial, based in Atlanta.

“A year from now you probably won’t be able to renew at those same rates,” he said.

Others may wish to park excess cash — sums that investors don’t need for short-term spending — in higher-paying fixed-income investments like longer-duration bonds, said Carolyn McClanahan, a CFP and founder of Life Planning Partners in Jacksonville, Florida.

“We’re really being aggressive about making sure clients understand the interest-rate risk they’re taking by staying in cash,” she said. “Too many people aren’t thinking about it.”

“They’ll be crying in six months when interest rates are a lot lower,” she said.

Bond duration is a measure of a bond’s sensitivity to interest rate changes. Duration is expressed in years, and factors in the coupon, time to maturity and yield paid through the term.

Short-duration bonds — with a term of perhaps a few years or less — generally pay lower returns but carry less risk.

Investors may need to raise their duration (and risk) to keep yield in the same ballpark as it has been for the past two or so years, advisors said. Duration of five to 10 years is probably OK for many investors right now, Sun said.

Advisors generally don’t recommend tweaking stock-bond allocations, however.

But investors may wish to allocate more future contributions to different types of stocks, Sun said.

For example, stocks of utility and home-improvement companies tend to perform better when interest rates fall, she said.

Asset categories like real estate investment trusts, preferred stock and small-cap stocks also tend to do well in such an environment, Jenkin said.

This post appeared first on NBC NEWS
You Might Also Like
  • Microsoft 365 working to address potential Outlook and Teams outage
  • USPS resumes shipments from China in abrupt about-face
  • Amazon increases average pay for warehouse workers and adds free Prime membership perk
  • Weeks before DeSantis takeover, Disney gave itself new powers over special Orlando district, document shows
Share
0
FacebookTwitterPinterestWhatsapp

previous post
Fed Chair Powell says ‘time has come’ for interest rate cut
next post
Pro-Palestinian group ‘Abandon Biden’ changes to ‘Abandon Harris’ ahead of election

You may also like

Some Juul users are receiving thousands of dollars as part...

October 22, 2024

More signs of slowing inflation may arrive in latest consumer...

December 13, 2023

Deutsche Telekom and T‑Mobile US introduce Network APIs and a...

February 27, 2023

Cavli Wireless to Reveal the Ultra Low-Cost CAT1.bis Module C16QS...

February 28, 2023

Microsoft to lay off more employees months after letting 10,000...

July 11, 2023

‘Inside Out 2’ tops $1 billion at the global box...

July 1, 2024

Collapse of fintech firm with 10M users leaves many Americans...

May 24, 2024

Boeing did not retain security camera footage showing work on...

March 15, 2024

Spotify and YouTube raise their premium-service pricing

July 26, 2023

Fed Chair Powell says holding rates high for too long...

July 11, 2024

    Stay updated with the latest news, exclusive offers, and special promotions. Sign up now and be the first to know! As a member, you'll receive curated content, insider tips, and invitations to exclusive events. Don't miss out on being part of something special.


    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    Recent Posts

    • Breakouts, Momentum & Moving Averages: 10 Must-See Stock Charts Right Now

      May 31, 2025
    • Leadership Rotation Could Confirm Corrective Phase

      May 30, 2025
    • Run Your Stock Portfolio Like a Pro Sports Team

      May 30, 2025
    • U.S. foreign tax bill sends jitters across Wall Street

      May 30, 2025
    • Amazon taps Xbox co-founder to lead new team developing ‘breakthrough’ consumer products

      May 30, 2025

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be...

      June 27, 2024 2,765 views
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as...

      August 9, 2024 2,472 views
    • 3

      Biden appointee played key role in recruiting Chinese...

      June 25, 2024 2,451 views
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful...

      July 10, 2024 2,432 views
    • 5

      Harris VP pick spent years promoting research facility...

      August 29, 2024 2,308 views

    Categories

    • Economy (7,009)
    • Editor's Pick (2,106)
    • Investing (538)
    • Stock (2,581)

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be revived under new House GOP bill

      June 27, 2024
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as Harris camp blasts ‘lying’ critics

      August 9, 2024
    • 3

      Biden appointee played key role in recruiting Chinese businesses to Delaware: ‘Longtime friends’

      June 25, 2024
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful of Chinese spy threats

      July 10, 2024
    • 5

      Harris VP pick spent years promoting research facility that collaborated with ‘Chinese military company’

      August 29, 2024

    Latest News

    • Breakouts, Momentum & Moving Averages: 10 Must-See Stock Charts Right...

      May 31, 2025
    • Leadership Rotation Could Confirm Corrective Phase

      May 30, 2025
    • Run Your Stock Portfolio Like a Pro Sports Team

      May 30, 2025

    Categories

    • Economy (7,009)
    • Editor's Pick (2,106)
    • Investing (538)
    • Stock (2,581)

    Disclaimer: RoundTableThoughts.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2024 RoundTableThoughts.com. All Rights Reserved.

    Round Table Thoughts
    • Investing
    • Stock
    Round Table Thoughts
    • Economy
    • Editor’s Pick

    Read alsox

    Trump’s deals to sell Bibles, sneakers...

    April 2, 2024

    The first Fed interest rate cut...

    July 30, 2024

    Here’s how Starbucks plans to improve...

    July 2, 2024
    Sign In

    Keep me signed in until I sign out

    Forgot your password?

    Password Recovery

    A new password will be emailed to you.

    Have received a new password? Login here