With the Federal Reserve having recently raised interest rates for the fourth time since the financial crisis, we thought it was an opportune time to discuss how changes in interest rates affect you as an investor. In this article we discuss the role of interest rates in an economy, how those interest rates change over time, and how those changes affect the value of different components of your portfolio.
Author: MI Research Team
Every year, top Wall Street analysts put their thinking caps on and try to forecast the upcoming year's market return. The result of their analysis usually comes in the form of "price targets" which indicate where major indexes such as the S&P 500 are likely to be at year end. While price targets have little value themselves, what is valuable to investors is having a framework in which to view future returns.
The age-old idea of not having all your eggs in one basket is considered timeless wisdom, but could it be working against you? In truth, diversification is a double edged sword. The benefit that it provides comes at a mighty cost. When it comes to investing, most individuals aren't aware of the hidden price they pay for this so-called "free lunch."
Evidence from numerous studies on behavioral finance suggests that the need for emotional comfort costs the average investor around 2-3% per year in foregone investment return. This shortfall, commonly referred to as the "behavior gap," stems from the fact that optimal long-term financial decisions are often very uncomfortable to live with in the short-term.
If you've ever worked with a financial planner or investment advisor, there's a good chance you're using an investment strategy known as strategic asset allocation. While you may not know it by that name, you're probably familiar with how it works. What you may not be of aware of, however, are how recent changes in financial markets have made this approach to investing more dangerous than ever before.