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How changing interest rates can influence your portfolio

Interest rates have been in the news so much lately that many investors are becoming concerned about the possible effect of the changes on their own finances. You may have been wondering if you should re-think your portfolio – and if, by doing so, you can avoid losses and improve your returns in the future.

James Law, CFP, senior financial advisor at American Express Financial Advisors, believes that every individual needs to sit down with a knowledgeable financial advisor before making any changes.

“Your investment decisions in a time of changing interest rates should take into account many considerations, such as where you make your home, what your life situation is, and what interest-bearing obligations or investments you have,” says Law.

Item: With interest rates going down, it might be a good time for home owners to consider refinancing their mortgages Law says: “Your financial advisor can consult a mortgage calculator to let you know how much you may be able to save.”

Item: “If you’re on a fixed income and dependent to a greater or lesser extent on interest earnings, recent developments will probably call for some belt-tightening. You might cut expenses for the short term or look at ways to increase the interest your bonds are earning. However, when looking for bonds with a higher interest rate, it’s important to be aware that doing so might also increase your risk.”

Item: Learn something about what comprises your portfolio. “There are three asset classes – equities, bonds and cash,” he says. “Equities are subdivided into the stocks of large, medium and small cap (capitalization) companies. Bonds are grouped as U.S. Treasury, corporate, and municipal issues. “When interest rates go up, bond prices generally go down and equities rise. If interest rates go down, the price of bonds will generally rise.”

As Law observes, “This simple fact reveals how important it is for all of us to practice asset allocation for the comfortable long term. Done right, asset allocation could reduce portfolio volatility, help you manage risk, and keep you moving toward your investment goals.”

Another thing that will also influence how you proceed is your tax situation, especially in relation to your city and state of residence. Law provides the following example: “Look at your cash reserves and decide whether you should be in tax-free instruments. In some states, such as New York, the interest rate is low. (Rates for your state and financial institution are readily available over the Internet at Bankrate.com.)

“In New York state, for example, fully taxable money market funds currently yield 5.5 percent, while tax-free instruments are 1.5 percent.* At least for the current time,” Law explains, “most New Yorkers will be better off in fully taxable money market accounts. But, this could change, which is why it is more important than ever to stay in close touch with your financial and tax advisors.”

* An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

March 1, 2001

American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer.
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