The uncertainty of rising rates
Central Banks use interest rate increases to slow down the increase in inflation. These past few months have tested the resolve of even the most seasoned of investors. Central Banks around the world are wielding a big axe in the form of interest rate hikes to cut down the rising inflation.Closer to home we have also felt the bite of rate increases as both the South African Reserve Bank (SARB) and the Bank of Namibia (BoN) increased their lending rates, with the outlook of more increases to come.
As is the case with the SARB which has a target to keep inflation between 4% and 6% by increasing interest rates, Central Banks attempt to cool down the economy by limiting the amount of available money which people can spend and instead redirect it to servicing their debt.
There is no doubt that we are currently in an upward interest rate cycle that may continue for some time. This uncertainty on how long this cycle will last and to what extent it will increase will also create volatility in the market as investors will start to get nervous which may result in talks of the possibility of market corrections and recession.
Given all the external influences and possible outcomes, investors may feel overwhelmed and wonder what the right course of action is to take. When volatile market conditions present themselves, investors are often tempted to act on their first instinct, which invariably is an emotional one. These decisions are later often regretted as investors may miss out on other opportunities that arose because of the volatility.
In these uncertain times, we often end up doing the exact opposite of what was called for. It is therefore always important to speak to your financial adviser, should you wish to make a change or feel that you are unsure about what is happening in the markets.
If you wish to enter the market or seek to invest your hard-earned funds, the challenge investors face is: what are my available options, or do I simply put my money under my mattress? The rising interest rate cycle is providing investors with a reprieve of sorts albeit in the short term. Whilst it is not advisable for a long-term investment strategy to be based solely on investing in cash, rising rates do offer a place to park your funds in the short-term whilst you let the market conditions provide a clearer entry point into longer-term investment options such as equities.
The saying that cash is trash may ring true in a high inflationary environment, but in a rising interest cycle, short-term cash provides a temporary haven to allow investors to better plot their course of action as opposed to rushing into making decisions that may end up causing more harm than good.
Short-term fixed interest type funds such as Money Market provides investors with a reprieve and the ability to park funds for the short-term.
Best-laid plans can be undone through rash decisions or paralyzed indecision. Always consult your financial adviser to assist in the choices that you make or in the discomfort that you may feel.
In uncertain times, we sometimes need protection from ourselves rather than the markets. One part of reaping excellent investment returns is to be ready to act when the situation calls for it.
*Katja Meier is a Wealth Specialist: Old Mutual Wealth.