November 11, 2015
What comes down must go up, and interest rates will rise again. David Mook, Chief Private Banking Officer for The Private Client Reserve, provides ideas on how to prepare to take advantage of the rise:
1 Think about cash.
Investors should think about potentially getting out of cash. Cash is a very low-yielding asset, and the purchasing power of cash is eroded by inflation.
2 Consider fixing rates on long-term floating rate debt.
By the time the Fed raises short-term rates, long-term rates will already have moved. If rates are heading up and investors have a lot of floating rate debt, one thing they might consider is fixing the rate on some or all of that debt — just to lock in their cash outflows. It’s really more of an insurance policy than anything else.
3 Consider using modest leverage to enhance returns on opportunistic investments.
Rates are going to go up slowly, so it will continue to be inexpensive to borrow, especially on a short-term basis. If the economy is getting better, there should be good opportunities to invest. Using a little bit of leverage could help enhance those returns. Investors should be aware that leverage could also accentuate losses if the investment does not perform as expected.