What’s a smart investment when the Fed raises interest rates?

By | May 10, 2022

I remember the last time inflation spiked, in 2010-2011, plenty of people got their fingers burned to invest in commodities and gold.

You can see the underlying mood, at that time, below:

https://www.businessinsider.com/standard-chartered-5000-dollar-gold-2011-6  https://www.reuters.com/article/us-commodities-idUSTRE6A42S820101105 

Just a few years previously, in 2007, plenty of people reacted to the $146 gold price, by predicting it would hit $250:

Crude oil at $250 per barrel?
Forecasting future price of oil is hazardous.

The inflation this time is different as it is connected to the supply chain issues caused by the pandemics and lockdowns, but what I do know is this:

1. Just like in 2007, 2010 and 2011, many people will buy commodities and gold at a high level and regret

2. As in 2000-2002, 2008, 2020 and every other time markets have fallen by 20% or more, people will panic sell and regret it

3. The long-term stock investors performance will not be affected at all by what is happening in 2022, just as the 2022 stock market values isn’t linked to what was in the news in 1993.

4. Cash is a guaranteed loss to inflation

5. The keys to long-term success are time diversification (being in assets for a long-term) and asset diversification (not putting all your eggs in one basket), unless you want to take much more risk.

Putting it crudely, the longer you are in assets like the stock market, and the more (sensible) assets you are in, means the less likely you are to not lose money.

6. The less you analyse once you invest, the more you will make.

According to various studies, the investment accounts of dead people outperform the living – even knowledgable people in investing.

The reason is simple – markets rise over time and dead people don’t have emotions so can’t panic sell after watching some fearmongering news article.

So, don’t focus on what will be your return in 2022, or even 2023. Just have a good long-term plan, and stick to it.

Stocks had a lost decade from 2000-2010, just like in 65-82, but that didn’t stop the long-term investor making money.

London real estate has had plenty of lost decades too in the last hundred years.

That doesn’t mean that it wasn’t sensible to own just because of short or even medium-term performance.

One thing that will get affected by rising interest rates and inflation is margin trading.

Plenty of people, including many high-net-worth individuals, have been used to getting money lent to them at low levels of interest rates via lombard loans and other loans.

Just in the same way that mortgages, and the associated debt/leverage, can improve a property’s performance, so can margin, even though it is risky.

If you can get money for 1%-2%, and invest it into very low-risk assets, you are making money from doing little and not taking huge risks.

That will change if interest rates and inflation rise, which means fewer people will take such options or will need to get higher returns on the investments to justify the loans. Anyway, I digress.

So, in summary, be proactive when setting up a sensible diversified investment account but then learn from the best investors of all…….the dead……and also be careful with leverage.

Pained by financial indecision? Reach out today!

Leave a Reply

Your email address will not be published.