Issue 42.13
Syria, the government shut down, the debt ceiling, Obama Care, interest rate increases with the government tapering of bonds, I am not sure that at any time in history have we had so many factors that can change or have an impact on our economy in the near future. So many clients are asking for advice when it comes to the market and these factors and how that will affect their choices as we wind up the last quarter of the year.
First, let me say that if anyone thinks they know exactly the direction the markets are heading can be just as wrong as your father in law who is burying all of his excess funds in the gold and silver markets for safety. But, let me try and simplify our team’s thoughts as we head into an ever changing environment.
1. Interest rates will continue to rise. The days of historic low interest rates are over and will increase depending upon the timing that the Fed actually starts the tapering of buying Mortgage backed bonds, and whether it is this month, next month, or the first of the year, mortgage interest rates will continue to increase. As interest rates increase, our bond values will decrease because our current yield decreases as interest rates rise.
2. The equities or stock market most likely will see a correction. Being at all time high’s in the indexes and markets, analysts are in general thought that we expect a correction in the stock market. Nobody can tell you how deep and when, but with the old saying when interest rates are low stocks will go. When interest rates are high stocks will die. Well, interest rates won’t be high most likely for some time. But with the increase in interest rates, we should expect the market to correct and have some losses from its high’s that we are enjoying now.
3. The Political unrest is and continues to add an uncertainty in all markets. Usually, when there is instability in the world and or politics, then money flows into safe markets, meaning the bond markets. We have seen that over the last couple of weeks with the events of Syria and the Government Shut down due to the bottleneck in our current political system. Money has left the equities market short term and flooded the bond market over the last couple of weeks. This lowers our mortgage bond interest rates, which is a good thing in our industry, but ultimately reduces your interest on investments when it comes to fixed instruments.
As a senior client, to sum things up in a real general and simple manner, interest rates will and are expected to increase. So, if you’re looking at buying a home and or re-financing your existing mortgage and you have not over the last couple of years, or looking at re-financing any commercial debt that you can lock in the interest rate, it most likely will behoove you to do so.
If you’re over 65 and invested in the equities market, you will need to discuss with your financial advisor your risk level and your ability to make it through a dip in the stock market. There are really two philosophies here. The first being that a senior client cannot afford a 20% fall off in the market place again as we have seen in the last few years. They are living on that income and they are not funding that portfolio, so they don’t have the time to wait until the market recovers as that is their retirement income.
The second philosophy is that advisors will argue that we need to have funds diversified in the market place in some fashion to keep up with interest rates. And, if we are 65 today, we better expect to live longer and be prepared for a 20 year retirement and some balance in equities is one of the few ways to do so. So, fundamental investment advisors will make sure you are diversified and continue to rebalance your portfolio as the market continues to change on a monthly basis in this turbulent time.
So, the first philosophy will simply say, “That if you would not invest in the market when it is at all time high’s as it is, then why continue to keep funds exposed if you cannot afford to lose these funds or have the time to let them correct back in the stock market.
Mark Twain used to say, “It is not the return on the money that I am investing, but my concern is the return of my money.”
But, the counter argument is that because we are living longer the risk with inflation can eat away our retirement portfolio at a greater pace then trying to protect it from the equities market and the potential gain it can provide. Please discuss with your financial advisor and or licensed mortgage planner any of the discussions above and continue to ask questions. If we can help, please contact our office and or your current licensed financial planner and or mortgage planner today. Until next month.
Brandon Hansen is a Senior Mortgage Banker, Registered Investment Adviser Representative for Cherry Creek Mortgage / National Advisor’s Network. He can be contacted at 435 668 2840 / 435 525 2266.