Federal Reserve Chairman Powell.
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Federal Reserve Chairman Powell said on Friday The clearest sign yet The central bank may start lower interest ratescurrently in their highest level Twenty years later.
If a rate cut occurs in September, as experts expect, it would be the first rate cut by officials in more than four years. cut them It was close to zero at the start of the Covid-19 pandemic.
Investors may be wondering what to do on the verge of this policy shift.
Companies that are already well diversified may not need to do much now, financial advisers say advisory board.
“For most people, this is welcome news, but it doesn’t mean we’re making major changes,” said Winnie Sun, co-founder and managing director of Sun Group Wealth Partners in Irvine, California.
“It’s kind of like getting a haircut: We do little trims here and there,” she said.
Many long-term investors, such as those who hold most or all of their assets in target-date funds through 401(k) plans, may not need to do anything at all, advisers say.
Such funds are overseen by professional asset managers who can make the necessary adjustments for you.
“They do it behind the scenes on your behalf,” says Lee Baker, a certified financial planner in Atlanta and founder of Claris Financial Advisors.
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In other words, more practical investors can consider some adjustments.
Advisers say the adjustments will largely apply to cash and fixed-income assets, and perhaps also to the types of stocks in the portfolio.
Lower interest rates are ‘positive’ for stocks
Powell said in a keynote speech at the Federal Reserve’s annual retreat in Jackson Hole, Wyoming on Friday that “the time has come” to adjust interest rate policy.
The announcement comes as inflation has fallen sharply from its pandemic-era peak in mid-2022. The labor market, while still relatively healthy, is showing signs of weakness. Lowering interest rates will take some of the pressure off the U.S. economy.
Stephen Brown, deputy chief economist for North America at Capital Economics, wrote in a note on Friday that the Fed may choose to cut interest rates by 0.25 to 0.50 percentage points at its next policy meeting in September.
Marguerita Cheng, CFP and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, said lower interest rates are “generally good for stocks.” For example, she said businesses may be more willing to expand if borrowing costs are lower.
But advisers said uncertainty about the number, size and pace of future rate cuts means investors should not have a knee-jerk reaction to Powell’s announcement and make large-scale portfolio changes.
“Things may change,” Sun said.
Importantly, Powell stopped short of committing to lower rates, saying the trajectory would depend on “the latest data, the evolving outlook and the balance of risks.”
Cash, Bonds and Stocks Considerations
Falling interest rates generally mean investors can expect lower returns on “safer” funds, advisers say.
This would include relatively low risk assets such as Cash held in savings accountmoney market funds or funds in certificates of deposit, short-term bonds.
High interest rates mean investors are getting fairly high returns on these low-risk assets.
It’s a bit like getting a haircut: we do little trims here and there.
Sun Wenni
Co-Founder and Managing Director, Sun Group Wealth Partners
However, such returns are expected to decline as interest rates fall, advisers said. They often recommend locking in a high guaranteed interest rate while cash is still available.
“For those considering buying a CD at a bank, this could be a good time to lock in a higher interest rate for the next 12 months,” said Ted Jenkin, CFP, CEO and founder of oXYGen Financial in Atlanta. express.
“After a year, you may not be able to renew at the same price,” he said.
Others may want to stash away excess cash—funds investors don’t need for short term expenses Invest in high-yielding fixed-income investments like long-term bonds, says Carolyn McClanahan, CFP and founder of Life Planning Partners in Jacksonville, Florida.
“We are really proactive in making sure customers understand the interest rate risk they face by holding cash,” she said. “Too many people are not thinking about this.”
“Six months from now, they’re going to cry when interest rates are lowered significantly,” she said.
bond term A measure of a bond’s sensitivity to changes in interest rates. Duration is measured in years and takes into account the coupon, time to maturity and yield paid over the term.
Short-term bonds—which may have maturities of a few years or less—generally have lower returns but carry less risk.
Advisers say investors may need to increase duration (and risk) to keep yields at levels seen over the past two years or so. Currently, a five- to 10-year horizon may be OK for many investors, Sun said.
However, advisors generally do not recommend changing stock-bond allocations.
But Sun said investors may want to allocate more of their future contributions to different types of stocks.
For example, stocks of utility and home improvement companies tend to perform better when interest rates fall, she said.
asset classes such as real estate investment trusts, preferred stock Small-cap stocks also tend to perform well in this environment, Jenkin said.
