With Interest Rates Expected to Rise Any Time, Your Portfolio Strategy for 2015 Should Be Defined by a Longer Term Outlook
The stock market is one of the most lucrative forms of investment. It is especially good for creating wealth for your retirement as stocks tend to yield more benefits as a long term investment.
Investing in stocks or bonds is influenced by market lending rates. Bonds devalue due to low interest rates as they are a fixed investment. To encourage lending after the market crash of 2008, the Federal Reserve lowered lending rates, the reason being that if more people and businesses borrow, it might get the economy back on a growth track.
This decision (known as quantitative easing) has had an effect on investor decisions to buy stocks or fixed assets such as bonds and treasuries.
Fixed assets should form part of your investment portfolio when interests are high. This is because they allow you to securely invest your retirement money so that you get a stable income when you need it in the future. Therefore, when interests are low, that income is destabilized.
The reverse is true for stocks; a low interest environment makes the stock market thrive. Due to low interest, the stock market has been bullish for a couple of years, with a lot of growth experienced into the early months of 2015.
Will the Market Remain Bullish?
This bullish trend is expected to continue as long as interest rates remain low. The Federal Reserve could raise interest rates, and has in fact been hinting at it, though it largely maintains that until the US economy starts to experience sustainable growth, interest rates will remain low.
What Should You Do if Interest Rates Rise?
If interest rates rise, the stock market will go into correction in the short term, thereby interrupting the uptrend that has been so far experienced. The Federal Reserve can, however, not afford to raise interest rates too high as this will take the economy back into recession.
Interest rates will therefore be eased back up in a moderated manner. However, as the interest rate hike has been long expected, it is likely that any impact arising from stock correction will be absorbed, and if corporate earnings stay positive, the bull market will continue.
Your Strategy Should Be Long Term
Boosting your investment portfolio should not be reliant on bear or bull markets as you can never accurately tell how the market will turn out, especially in the short term.
As such, your strategy should be to buy reliable stocks from a reliable company that will still experience growth in the long term even after the market comes out of correction or if at worst, the market goes bearish for a while.
You have to analyze the stocks you want to invest in and decide if they meet the required parameters. You can do so with the below two methods:
Look at past stock price performance and use that to predict how the stocks are likely to perform in the future.
This involves trying to understand the company to determine its financial health, management stability and outlook. Learning about a company will give you confidence to invest in it.
Deciding where to take your portfolio in 2015 is a decision that you should make with solid facts in mind. If you have chosen the right stocks based on objective analysis, you will avoid being reactionary and dumping your stocks in a panic.